[House Hearing, 112 Congress] [From the U.S. Government Publishing Office] POTENTIAL MIXED MESSAGES: IS GUIDANCE FROM WASHINGTON BEING IMPLEMENTED BY FEDERAL BANK EXAMINERS? ======================================================================= FIELD HEARING BEFORE THE SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT OF THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED TWELFTH CONGRESS FIRST SESSION __________ AUGUST 16, 2011 __________ Printed for the use of the Committee on Financial Services Serial No. 112-54 ---------- U.S. GOVERNMENT PRINTING OFFICE 67-949 PDF WASHINGTON : 2011 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 HOUSE COMMITTEE ON FINANCIAL SERVICES SPENCER BACHUS, Alabama, Chairman JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts, Chairman Ranking Member PETER T. KING, New York MAXINE WATERS, California EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois RON PAUL, Texas NYDIA M. VELAZQUEZ, New York DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York JUDY BIGGERT, Illinois BRAD SHERMAN, California GARY G. MILLER, California GREGORY W. MEEKS, New York SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York JOHN CAMPBELL, California JOE BACA, California MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts THADDEUS G. McCOTTER, Michigan BRAD MILLER, North Carolina KEVIN McCARTHY, California DAVID SCOTT, Georgia STEVAN PEARCE, New Mexico AL GREEN, Texas BILL POSEY, Florida EMANUEL CLEAVER, Missouri MICHAEL G. FITZPATRICK, GWEN MOORE, Wisconsin Pennsylvania KEITH ELLISON, Minnesota LYNN A. WESTMORELAND, Georgia ED PERLMUTTER, Colorado BLAINE LUETKEMEYER, Missouri JOE DONNELLY, Indiana BILL HUIZENGA, Michigan ANDRE CARSON, Indiana SEAN P. DUFFY, Wisconsin JAMES A. HIMES, Connecticut NAN A. S. HAYWORTH, New York GARY C. PETERS, Michigan JAMES B. RENACCI, Ohio JOHN C. CARNEY, Jr., Delaware ROBERT HURT, Virginia ROBERT J. DOLD, Illinois DAVID SCHWEIKERT, Arizona MICHAEL G. GRIMM, New York FRANCISCO ``QUICO'' CANSECO, Texas STEVE STIVERS, Ohio STEPHEN LEE FINCHER, Tennessee Larry C. Lavender, Chief of Staff Subcommittee on Financial Institutions and Consumer Credit SHELLEY MOORE CAPITO, West Virginia, Chairman JAMES B. RENACCI, Ohio, Vice CAROLYN B. MALONEY, New York, Chairman Ranking Member EDWARD R. ROYCE, California LUIS V. GUTIERREZ, Illinois DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York JEB HENSARLING, Texas RUBEN HINOJOSA, Texas PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York THADDEUS G. McCOTTER, Michigan JOE BACA, California KEVIN McCARTHY, California BRAD MILLER, North Carolina STEVAN PEARCE, New Mexico DAVID SCOTT, Georgia LYNN A. WESTMORELAND, Georgia NYDIA M. VELAZQUEZ, New York BLAINE LUETKEMEYER, Missouri GREGORY W. MEEKS, New York BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts SEAN P. DUFFY, Wisconsin JOHN C. CARNEY, Jr., Delaware FRANCISCO ``QUICO'' CANSECO, Texas MICHAEL G. GRIMM, New York STEPHEN LEE FINCHER, Tennessee C O N T E N T S ---------- Page Hearing held on: August 16, 2011.............................................. 1 Appendix: August 16, 2011.............................................. 57 WITNESSES Tuesday, August 16, 2011 Barker, Gil, Southern District Deputy Comptroller, Office of the Comptroller of the Currency (OCC).............................. 11 Bertsch, Kevin M., Associate Director, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System................................................. 12 Copeland, Chuck, CEO, First National Bank of Griffin............. 33 Edwards, Bret D., Director, Division of Resolutions and Receiverships, Federal Deposit Insurance Corporation........... 9 Edwards, Jim, CEO, United Bank................................... 39 Fox, Gary L., former CEO, Bartow County Bank..................... 41 Rossetti, V. Michael, President, Ravin Homes..................... 36 Spoth, Christopher J., Senior Deputy Director, Division of Risk Management Supervision, Federal Deposit Insurance Corporation.. 7 APPENDIX Prepared statements: Barker, Gil.................................................. 58 Bertsch, Kevin M............................................. 81 Copeland, Chuck.............................................. 89 Edwards, Bret D., joint with Christopher J. Spoth............ 93 Edwards, Jim................................................. 113 Fox, Gary L.................................................. 116 Rossetti, V. Michael......................................... 142 Spoth, Christopher J., joint with Bret D. Edwards............ 93 Additional Material Submitted for the Record Westmoreland, Hon. Lynn: Written responses to questions submitted to Gil Barker....... 146 Written responses to questions submitted to Kevin M. Bertsch. 151 Written responses to questions submitted to Bret Edwards and Christopher J. Spoth....................................... 155 Letter from the American Institute of Certified Public Accountants (AICPA)........................................ 160 AJC op-ed.................................................... 162 Letter to Chairman Bachus and Chairwoman Capito from Andrew Alexander.................................................. 164 Written statement of the American Association of Bank Directors.................................................. 166 American Banker op-ed........................................ 170 Written statement of the Community Bankers Association of Georgia (CBA).............................................. 172 Written statement of First Cherokee State Bank............... 176 Written statement of the Georgia Bankers Association (GBA)... 180 Letter to Chairman Bachus and Chairwoman Capito from William and Deborah Lytle.......................................... 183 Written statement of Jerry Ownby............................. 186 Letter to Chairman Bachus and Chairwoman Capito from K.J. Sturhahn & D'Aunn Sturhahn................................. 187 Written statement of the American Land Rights Association (ALRA)..................................................... 190 Written statement of Hon. Jaime Herrera Beutler, a Representative in Congress from the State of Washington.... 200 POTENTIAL MIXED MESSAGES: IS GUIDANCE FROM WASHINGTON BEING IMPLEMENTED BY FEDERAL BANK EXAMINERS? ---------- Tuesday, August 16, 2011 U.S. House of Representatives, Subcommittee on Financial Institutions and Consumer Credit, Committee on Financial Services, Washington, D.C. The subcommittee met, pursuant to notice, at 9:05 a.m., in the Coweta County Performing Arts Center, 1523 Lower Fayetteville Road, Newnan, Georgia, Hon. Shelley Moore Capito [chairwoman of the subcommittee] presiding. Members present: Representatives Capito, Westmoreland; and Scott. Ex officio present: Representative Bachus. Chairwoman Capito. This hearing will come to order. First, I would like to thank Mr. Westmoreland for bringing this issue to the attention of the Financial Institutions and Consumer Credit Subcommittee. He has been a tireless advocate in the House--as all of you in the audience know--for his constituents and the financial institutions in his district. And I would also like to thank our witnesses for traveling to Newnan to testify and answer questions. For those of you in the audience, we will be maybe a little less formal than we might be in the regular committee hearing room. I should introduce myself. I'm Shelley Moore Capito, the Chairwoman of the Financial Institutions and Consumer Credit Subcommittee of the Financial Services Committee. Spencer Bachus, from Alabama, is the chairman of the full Financial Services Committee. Let me just explain the format, so you will all understand what we are going to do. We will do opening statements as Members, and then we will have two panels, which will consist of regulators and then bankers from in and around the region. They will have 5 minutes to give an opening statement and then we will be able to ask them questions. I am going to be pretty lenient on the question-and-answer period because I think that is where we glean the most information. But I do have my handy- dandy gavel that made it through TSA, so we are very happy about that. I also wanted to thank you for welcoming us to Georgia. By way of information, my grandparents were born in Perry, Georgia, so I have good credentials for Georgia. And I have quite a bit of family over in Columbus. And of course, I do remember the 2006 Sugar Bowl when West Virginia beat Georgia, but we will not talk about that. Sorry, I just had to bring it up. Anyway, the topic of this field hearing is critical to the overall economic recovery in the United States. Over the past few years, members of this subcommittee have heard accounts about over-zealous regulators and bank examiners from small business owners and financial institution executives. The subcommittee has held two hearings this year on the issue of mixed messages from Washington. In the sense that regulators in Washington are encouraging institutions to lend, while examiners in the field are applying restrictive standards that make it very difficult to lend, this hearing is a continuation of the mixed messages discussion. One of the major hurdles to a true economic recovery for both small businesses and financial institutions is uncertainty. New regulations created by the Dodd-Frank Act are only furthering the uncertainty for institutions, and subsequently our small businesses. We must work together to closely examine the application of regulations on financial institutions to ensure that the appropriate balance is reached between ensuring safe and sound institutions and providing the certainty necessary for encouraging economic growth. I want to stress that these concerns are not rooted in an effort to return to the regulatory landscape in the pre- financial crisis levels. There should be a healthy level of regulation of financial institutions. However, there needs to be room for institutions to take calculated risks when lending to spur economic development. Many members of this subcommittee fear that the pendulum has potentially swung too far to one extreme. We will continue to examine the issue of mixed messages from Washington-based regulators throughout this Congress. Finally, I would like to thank our second panel of witnesses for providing their perspective today. I know that many financial executives are hesitant to come forward publicly with their experiences with financial regulators. But it is important that their accounts be part of the public record. Again, I would like to thank my very good friend, Mr. Lynn Westmoreland, for graciously hosting the subcommittee in his district this morning. I look forward to hearing the testimony of all of our witnesses and I hope this continues a productive discussion forward. Now, I will recognize the chairman of the Financial Services Committee, Mr. Bachus, for 5 minutes for the purpose of making an opening statement. Chairman Bachus. I thank the chairwoman of the subcommittee for holding this hearing, and I particularly thank her for holding it outside Washington. I think it is important for Congress and for the regulators to actually visit Main Street, visit really in this case almost ground zero with many of our banks. I would also like to thank Mr. Westmoreland who, along with Mr. Scott, introduced a bill last month that actually came out of the committee on a unanimous vote and passed the Congress 6 days later. You hear a lot about partisanship. That was bipartisanship. And it expressed a concern that I think we all share, and when I say that, I mean the regulators, the bankers, Members of Congress, and business people, that we can do better in addressing the problems in our economy and problems in our community banks. America is made up really in our diversity and our diversity in our financial system is one of our strengths. One of the biggest strengths is the fact that we have many choices for consumers, and many times those choices are Main Street banks or local banks. People deal with people that they know, they know their reputation, they can--they do not have to bank with an institution where decisions are being made thousands of miles away. They can bank with an institution that is locally owned. And that is something that I know the regulators are committed to preserving. I was looking at the numbers on Georgia. About 1 out of 6 bank failures in the country have occurred here in Georgia, and in fact, over the last year it looks like it is more like 24 to 25 percent, which is pretty astounding. The bank regulators--to their credit--on February 10th of last year issued a joint policy statement. They all came together and I really believe that policy statement, which I am sure we will go into a little this morning, if we abide by that policy statement at the local level, we will be successful. And basically one thing it said, it actually specifically permitted reputational loans. It permitted banks to make decisions which did--in fact, all loans incur a certain amount of risk, but it actually enabled banks to make loans based on reputation. Many of our bankers tell us that they cannot make reputational loans, that the bank examiner simply will not allow that. And of course, a reputational loan has to have certain basic things, the borrower has to have the ability to pay it back, he has to have an income stream. So it is not just based on someone with a good reputation; it is someone who can pay that back. Let me close by saying two things. One thing is as we have this hearing, I think it is important to distinguish between the word ``regulation'' and the word ``management.'' I have talked to bankers, regulators, and Members of Congress, and I think we all agree that the regulators are to regulate, the bankers are to manage. Sometimes, the boundary between that line is blurred or difficult. But it is important that we allow, in the final instance, the bankers to make the decisions, as long as those decisions do not violate safety and soundness. Let me say one last thing. There is also a difference between liquidation and resolution. I have often heard the regulators say, ``We have resolved this situation.'' What actually has been done is they have liquidated the bank. And that is a failure. I think ultimate success would be restoring that institution to health and that ought to always be the priority. Sometimes, that is simply not possible. I can tell you that there have been banks in my hometown of Birmingham, Alabama, which simply could not be restored to health, and the longer they operated, the more exposure to the taxpayer. But I have also on occasions felt as if the message coming from the regulators was, ``we have successfully resolved this institution,'' and that ought to always be a last resort. And sometimes, I fear that it has been done, and actually because of loan loss agreements and sharing agreements, actually the cost has been greater than restoring that institution to health. But at the same time, I do not want to second-guess the regulators. Thank you, Chairwoman Capito, for allowing me to participate and thank you, Mr. Scott and Mr. Westmoreland, two fine Members of Congress. And Mr. Westmoreland, as we all know, and Mr. Scott, have been bipartisan leaders in this issue. Thank you. Chairwoman Capito. Thank you, Mr. Chairman. I would like to recognize Mr. Lynn Westmoreland, Third District of the beautiful State of Georgia, for an opening statement. Mr. Westmoreland. Thank you and I want to welcome everybody to Georgia's Third Congressional District and I want to thank Chairwoman Capito and Chairman Bachus and Congressman Scott for coming down. I want to thank all the witnesses for coming. Madam Chairwoman, will we have 5 days for people to submit--5 business days-- Chairwoman Capito. Yes. Mr. Westmoreland. Thank you. Chairwoman Capito. Actually, we will have 30 days. The hearing record will stay open for 30 days to submit statements. Mr. Westmoreland. Thank you. And again, thank you, Chairman Bachus, for helping us move this bill so quickly and Subcommittee Chair Capito, especially for--Spencer, you did not have that far to come, but Shelley did, so thank you all for coming to listen to this hearing on our bank failures and the mixed messages that the regulators are sending to our community bankers. I would also like to thank the witnesses for traveling here today and all those in the audience who have made this trip to join us. In Georgia, bank failures are the major threat to the well- being of our communities. Banks in Georgia, both strong and weak, big and small, are trying to survive in a market where the government is picking winners and losers every day, and especially on Fridays. I know, I wait every Friday for the dreaded email to come from the FDIC that yet another bank in Georgia has failed. As many of you know, and we have experienced personally, 67 Georgia banks have failed since 2008. That is 25 percent of our banks. Sadly, there are some communities in my district that no longer are served by a community bank. If you ride up and down 34 highway, and I am sure it is a wonderful bank, but you will see the Bank of the Ozarks in our community. I hear every week from bankers across Georgia that regulators just are not listening, or being able to use any common sense or even wanting to help. And curiously, some of these regulators have never even worked in a bank and never even made a loan. In the 1980s, the agencies testifying today took much criticism from the handling of the savings and loan crisis. Lax enforcement of the rules created more failures. However, the great community bank crisis of 2008 has seen regulatory swing in a completely opposite direction. Now, strict enforcement has created more failures. Banks that were too-big-to-fail have survived; banks too-small-to-save have been cut loose. I am convinced there must be some middle ground between these two extremes. Our communities every day are losing generational wealth that the pillars of these communities have put into these banks. That money will never come back. The main problem I have experienced is there is both too much and too little information to evaluate the job the regulators have been doing. Without a doubt, the FDIC is a wealth of information about the health of banks if you have the time and resources to go through it. However, I felt more analysis was needed. Therefore, myself and Congressman Scott introduced H.R. 2056 to study the underlying fundamentals that continue to cause bank failures across this country. The bill directs the FDIC Inspector General, in consultation with the Treasury and Federal Reserve IGs, to study the FDIC policies and practices with regard to shared-loss agreements, the fair application of regulatory capital standards, appraisals, the FDIC procedures for loan modifications, and the FDIC's handling of consent orders and cease and desist orders. Further, the GAO also has a study in the bill to pursue those questions the FDIC IG is unable to fully explore, such as the causes of the high number of bank failures, the impact of fair value accounting, the analysis of the impact of failures on the community, and the overall effectiveness of shared-loss agreements for resolving banks. Thanks to Chairman Bachus and Subcommittee Chair Capito, this bipartisan bill moved quickly through the Financial Services Committee and passed the House on July 28th by voice vote. On the other side of the Capitol, our colleague from Georgia, Senator Saxby Chambliss, took this on and tried to get it passed before the August recess in the same bipartisan spirit in which it passed the House. Unfortunately, the FDIC and the American Institute of Certified Public Accountants have both blocked the study from moving forward. I hope the FDIC and the AICPA will state here for the record that they will reach out to the Senate so all objections will be removed and this bill will pass quickly in early September. To the bankers and small business owners testifying here today, I appreciate the honest assessment of your experience in this tough business environment. There has been a longstanding struggle from my office to receive an honest assessment of the job the regulators are doing, from the businessmen willing to come forward and share their experience for the record. And I appreciate your courage. We had a number of people who would tell us their story, but were unwilling, because of fear of retaliation, to come testify today. And that is a shame. To those in the audience, know that while I would like to have everyone testify today, my office is always willing to submit your experience for the record and we have 30 days to do that. And furthermore, I hope the regulators on this first panel will remain in the room for the second panel and listen to what they have to say. Too many times, the first panel of the government officials will come in, testify, and then leave. We are not in D.C., I hope you do not have anywhere to go, and we will make sure you get a good lunch if you will stick around and listen to some of these people that we listen to each and every day. In closing, Georgia is in a banking crisis. To overcome this crisis, regulators, examiners, and bankers must work together to further investment in our small businesses and create jobs. With that, Madam Chairwoman, I yield back. Chairwoman Capito. Thank you. I would like to introduce Congressman David Scott from the 13th District of Georgia. Mr. Scott is a very forceful member of the subcommittee and the full committee and he has been out front with Mr. Westmoreland on this particular issue. Welcome, Mr. Scott, and thank you. Mr. Scott. Thank you, thank you very much. And I certainly want to welcome you, Chairwoman Capito, to Georgia and our chairman, the distinguished chairman who does an extraordinary job on our committee and is a great personal friend to me, Chairman Bachus, thank you for coming. And of course, Lynn, it is always a pleasure working with you. Lynn and I go all the way back to our days in the Georgia legislature, and it has been a pleasure working with you, bringing forward this very important bill. This is a very, very serious issue and we will never be able to find our way out of this economic doldrum that we are in and get the kind of recovery that we need unless our banks are thriving and they are able to lend money. Our banks are like the heart of our system. Like the heart pumps out the blood, banks pump out the credit and pump out the cash and pump out the lending to small businesses, to individuals so that our economy can grow. But when we have a rash of bank failures in one geographic area of the United States which account for over 25 percent of all of the bank closures, and in less than 4 years, over 60 banks in this one State fail, we have to dig deep and find out what happened. And I think that is one of the biggest contributions that we can make today with our distinguished committee and representatives. We have to find out from the FDIC, the Office of the Comptroller of the Currency, and the Fed, all of our examiners and regulators, what went wrong, why did this happen. And if the discovery comes out to be, as many have said, that so many of our banks overleveraged their portfolios into real estate, well if we knew this, why didn't some red flags go up? So, we have some serious questions to ask here. And then secondly, what can we do now to make sure that we have no more bank closures in this State? Just recently, we had a couple of banks close. So the situation goes on. I think there have to be some very serious questions asked. I think that we have to examine the impact of mark-to-market accounting, what role that played in it. I think we also have to make sure--and I want to echo what Lynn said, because we have two panels here: we have the regulators; and we have the examiners. It is important that the examiners stay so that you can hear from our banking folks, so they can have an opportunity to put the issues right before them. We have had many hearings on this issue. We hear from our friends in the banking community who basically say the regulations are too stringent, they are putting too much pressure, particularly pressure in terms of an issue just simply as asset write-downs, which require and put enormous amounts of pressure on banks that go out in a hurry and raise capital. We need to examine this to see if this is the correct procedure. And then we need to come out of this figuring out what, in Washington, are we doing that we need to correct ourselves. And I think if we look very closely and examine each of these questions and really be as frank and as honest as we can today, we will make a great contribution, not just in terms of the banking situation here in Georgia, but this is the epicenter and I think the great contribution we will make here is that we will be able to provide valuable information going forward for our entire country because other parts of the United States are suffering from this as well. I look forward to this hearing. I also would like to get some opinions from our panelists on the impact of our bill. Is it enough? Can we do more? In the process, as we go and continue to negotiate this bill, are there some more things we need to add to it to make it stronger? So this is going to be a good hearing, and I am really looking forward to it. And I thank you all for your participation. Chairwoman Capito. Thank you, Mr. Scott. Now, we will go to the panel. Our first witness is Mr. Christopher J. Spoth, who is the Senior Deputy Director, Division of Risk Management Supervision for the Federal Deposit Insurance Corporation, better known as the FDIC. Welcome, Mr. Spoth. STATEMENT OF CHRISTOPHER J. SPOTH, SENIOR DEPUTY DIRECTOR, DIVISION OF RISK MANAGEMENT SUPERVISION, FEDERAL DEPOSIT INSURANCE CORPORATION Mr. Spoth. Chairman Bachus, Chairwoman Capito, and members of the subcommittee, Congressman Westmoreland, Congressman Scott-- Chairwoman Capito. If I could ask you--I think you have to really lean into the microphone so everybody can hear you. Mr. Spoth. I apologize. Thank you so much for the opportunity to testify here before the committee. As the Senior Deputy Director of the Division of Risk Management, I oversee the FDIC's safety and soundness examination program. Twice in my FDIC career, I lived in Georgia, and it is a pleasure to be back today, and outside of Washington, as you say. The FDIC is the primary Federal regulator for State- chartered banks that are not members of the Federal Reserve System. We supervise 4,700 banks. Georgia has 261 banks and the FDIC is the primary Federal regulator for 211. We have field offices in Atlanta, Albany, and Savannah, plus a regional office in Atlanta. Our examiners are knowledgeable about the economic challenges confronting banks and their customers. The FDIC works closely with the Georgia Department of Banking & Finance. Georgia's economy was hit especially hard by the housing market collapse in 2007 and the financial crisis and economic recession that followed. The pace of economic recovery has been slow, and conditions in Georgia remain challenging. The State's unemployment is higher than the national average, and its banks have lost money for 10 consecutive quarters. The non-current rate for construction and development loans in Georgia has been over 20 percent for 2 years. High levels of construction and development lending have been a common characteristic of failed banks, and Georgia had the highest construction rate of any State in 2007. We are keenly sensitive to the hardship that bank failures pose to communities and borrowers. Our supervisory goal is always to avert a bank failure by initiating timely corrective action. Most problem banks do not fail. In fact, most banks across the country are in sound condition, well-capitalized and profitable, although Georgia has been affected more than most. Community banks play a vital role in credit creation. While community banks represent only 11 percent of industry assets, they provide 38 percent of bank loans to small businesses and farms. However, surveys of bankers and businesses have identified three primary obstacles to making loans at this time: lack of demand from creditworthy borrowers; market competition; and the slow economy. In response, the FDIC has adopted policies that can help community banks and their borrowers. Since 2008, the banking agencies have issued statements encouraging banks to lend to creditworthy borrowers, to prudently restructure problem commercial real estate loans, and to meet the credit needs of small business. The FDIC sponsored a small business forum earlier this year. Chairman Bachus attended and spoke at that forum. The FDIC's examination program strives for a balanced approach. Examiners conduct fact-based reviews of a bank's financial risk, the quality of its loan portfolio, and conformance with banking regulations. In analyzing a loan, our examiners focus on the borrower's cash flow. If the borrower cannot pay the principal and interest, then the examiner will consider any collateral or guarantees. We do not focus on distressed property sales. Loans at risk of non-payment are usually identified by the bank itself. At the conclusion of their examination work on site, FDIC examiners always discuss their preliminary findings with the bank management. This provides an opportunity to express the bank's point of view on findings, recommendations, and the supervisory process. We conduct more than 2,500 on-site examinations annually, and we recognize that questions and disagreements may arise, especially during difficult economic times. The FDIC has a number of channels available for bankers to appeal examination matters. Care is taken to ensure national consistency. We ensure that examiners follow prescribed procedures and FDIC policy through our national training program and commissioning process, internal quality reviews, and ongoing communication at every level. Members of our board of directors and all of our Washington and regional executives are dedicated and involved in this effort. The FDIC welcomes feedback and relies on bankers' informed perspectives. We meet regularly with banker groups to discuss the examination process. A significant resource is our advisory committee on community banking established in 2009. This committee, which includes a community banker from Georgia, provides us with advice and guidance on a range of policy issues. Our Atlanta regional office meets regularly with banker groups and has welcomed all opportunities to meet with bankers. The FDIC's Regional Director, Tom Dujenski, is here in the audience today. I will now turn it over to my colleague, Bret Edwards. I will be pleased to answer any questions, and I heartily accept the invitation to stay and listen to the banker panel. [The joint prepared statement of Mr. Spoth and Mr. Bret Edwards can be found on page 93 of the appendix.] Chairwoman Capito. Thank you, Mr. Spoth. And now our second witness is Mr. Bret D. Edwards, Director, Division of Resolutions and Receiverships at the FDIC. Welcome, Mr. Edwards. STATEMENT OF BRET D. EDWARDS, DIRECTOR, DIVISION OF RESOLUTIONS AND RECEIVERSHIPS, FEDERAL DEPOSIT INSURANCE CORPORATION Mr. Bret Edwards. Thank you. Chairwoman Capito, Chairman Bachus, and members of the subcommittee, I appreciate the opportunity to testify on how the FDIC resolves failed banks, and in particular on the shared-loss agreements we have employed during the current crisis. Throughout the financial crisis, the FDIC has worked to maintain financial stability and public confidence in the banking system by giving insured depositors of failed banks quick and easy access to their funds. When a bank is closed by the Comptroller of the Currency or a State banking commissioner, the law requires the FDIC to use the least costly method of resolving the failed bank in order to minimize the costs of bank failures to the Deposit Insurance Fund or the DIF. With each bank failure, we use a bidding process to find a bank to take over the performing and non-performing assets of the failed bank, along with the bank's deposits and other liabilities. Such a whole bank resolution has benefits for the failed bank's borrowers and the community, as well as the DIF. The bank's borrowers benefit because the assuming bank is a potential new source of credit. And the community benefits from stabilized asset values. In addition, because the failed bank's assets are managed by the assuming bank, the FDIC's asset- related expenses are significantly less than they would be if the FDIC were to manage and liquidate these assets on its own. Finally, everyone benefits when these assets are managed rather than put into an already strained market at fire sale prices. During the current financial crisis, turmoil in the economy and significant uncertainty about future loan performance and collateral values have made potential buyers of failed banks reluctant to take on the risk of the failed bank's non- performing loan portfolios. As a result, the FDIC has often been required to use a modified version of the whole bank resolution that includes a shared-loss agreement. This was particularly true during the early stages of the crisis. The FDIC estimates the use of shared-loss agreements has saved the DIF, and the thousands of banks that fund the DIF, almost $40 billion during the current crisis. Unfortunately, a small percentage of failing banks still do not attract viable bids because they have little or no franchise value, and the quality of their assets is very poor. In those instances, the FDIC pays the depositors the insured amount of their deposits and depositors with uninsured funds and other general creditors are given receivership certificates entitling them to a share of the net proceeds from the liquidation of the failed institution's assets. Typically in a payout like this, there is no new source of credit available for troubled borrowers. Since the crisis began in 2007, the FDIC has successfully found banks to take over 61 of Georgia's 67 failed banks. Forty-one of the 67 banks were acquired by Georgia-based institutions, while 10 other acquirers are from contiguous States. Under shared-loss agreements, the assuming bank takes ownership of the failed bank's assets and the FDIC agrees to absorb typically 80 percent of the losses on a specified pool of assets, while the assuming bank is liable for the remaining 20 percent of the losses. Each assuming bank is required to utilize a least loss strategy in managing and disposing of these assets. Shared-loss agreements soften the effect of bank failures on the local markets by keeping more of the failed bank's borrowers in a banking environment. The assuming bank can more easily work with the borrowers to restructure problem credits and advance additional funding where prudent. And in fact, shared-loss agreements require assuming banks to review qualified loans for modification to minimize the incidences of foreclosure. Because the assuming banks share approximately 20 percent of any losses on covered loans, they are motivated to restructure a loan whenever a modification would produce a greater expected return than a foreclosure or short sale. We also require assuming banks to manage covered assets just like their own portfolio, consistent with prudent business practices and the bank's credit policies. The incentives for pursuing modifications and the requirement for consistent treatment of assets work together to prevent a fire sale strategy. The FDIC monitors compliance with the shared-loss agreements, including the requirement to consider loan modifications through quarterly reporting by the assuming bank and performing periodic reviews of the assuming bank's adherence to the agreement terms. To enforce compliance with the agreement, the FDIC will delay payment of loss claims until compliance problems are corrected. We can also deny payment of a claim altogether or cancel a shared-loss agreement, if compliance problems continue. While we believe the shared-loss agreements have significant benefits, as the economy improves, we expect to see fewer resolutions with loss share. Thank you for allowing me to testify today and I look forward to your questions. [The joint prepared statement of Mr. Spoth and Mr. Bret Edwards can be found on page 93 of the appendix.] Chairwoman Capito. Thank you. Our third witness will be Mr. Gil Barker, the Southeast District Deputy Comptroller for the Office of the Comptroller of the Currency. Welcome, Mr. Barker. STATEMENT OF GIL BARKER, SOUTHERN DISTRICT DEPUTY COMPTROLLER, OFFICE OF THE COMPTROLLER OF THE CURRENCY (OCC) Mr. Barker. Chairwoman Capito and members of the subcommittee, I appreciate this opportunity to discuss the OCC's supervision of community banks and the steps that we take to ensure that our supervision is balanced, fair, and consistent with OCC policies. My district supervises more than 650 federally-chartered community banks and thrifts, including 45 national banks and thrifts in the State of Georgia. I have been involved in the direct supervision of community banks for most of my career, so I have a deep appreciation for the challenges that these bankers face. Community banks play a crucial role in providing consumers and small businesses with essential financial services and credit that is critical to economic growth and job formation. Our goal is to ensure that these banks have the strength and the capacity to meet these credit needs. I understand that some bankers believe that they are receiving mixed messages from regulators about the need to make loans to creditworthy customers, and I appreciate the opportunity to address these issues today. The OCC's policies encourage banks to make loans to creditworthy borrowers and to work constructively with borrowers. We have mechanisms to help ensure that our examiners apply these policies in a consistent and balanced manner. We alert our examiners to new policy issuances via weekly updates. When warranted, we supplement these issuances with targeted supervisory memos that provide additional direction for implementing on a consistent basis. We reinforce these messages through periodic national teleconferences and meetings at our local field offices. We have quality assurance processes to ensure that our examiners are applying our guidance consistently. Every report of examination is reviewed and signed off by an appropriate Assistant Deputy Comptroller before it is finalized. Additional levels of review occur when enforcement actions are involved. Our formal quality assurance processes assess the effectiveness of our supervision and compliance with OCC policies through quarterly randomly selected reviews of the supervisory record. While a bank's supervision policies and procedures establish a consistent framework and expectations, our examiners tailor their supervision to each bank and its individual risk profile and business model. Our front line managers who are located in the local communities are given considerable decision-making authority, reflecting their on-the-ground knowledge of the institutions that they supervise. To support our local examiners, we have district analysts who monitor and provide information on local markets and conditions. This information allows us to tailor our supervisory activities to unique challenges being faced within local economies and business sectors. We also have an extensive outreach program with State trade associations and we meet with our State and Federal regulatory counterparts to share information and discuss issues. OCC examiners assess the quality of the bank's loan portfolio during each examination cycle. The goal of our reviews is to confirm the accuracy of bank management's own assessments of credit quality. If a borrower's ability to repay a loan becomes impaired, we expect the bank to classify the loan to recognize the increased risk. To provide consistency in the examination process, the OCC and other bank agencies use a uniform risk scale to identify problem credits. Consistent with generally accepted accounting principles, the call reports require that a loan be put on non- accrual status when full repayment of principal and interest is not expected. In making these decisions, each loan must be evaluated based on its own structure, terms, and the borrower's ability to repay under reasonable repayment terms. A loan is not classified simply because a borrower is based in a certain geographic region, when they operate in a certain industry, or because the current market value of the underlying collateral has declined. Our supervision strives to ensure that problems are identified and addressed at an early stage before they threaten the bank's viability. When these efforts are not successful and the bank is not viable, we work closely with the FDIC to effect early and least cost resolution of the bank. The OCC's supervisory philosophy is to have open and frequent communications with the banks that we supervise. While I believe that OCC examiners are striking the right balance in their decisions, my management team and I encourage any banker who has concerns about a particular examination finding to raise these concerns with their examination team, with the supervisory office, with me directly, with the OCC's independent ombudsman. Thank you, and I would be happy to answer questions afterwards. [The prepared statement of Mr. Barker can be found on page 58 of the appendix.] Chairwoman Capito. Thank you, Mr. Barker. And our final witness on this panel is Mr. Kevin Bertsch, Associate Director, The Board of Governors of the Federal Reserve System. Welcome. STATEMENT OF KEVIN M. BERTSCH, ASSOCIATE DIRECTOR, DIVISION OF BANKING SUPERVISION AND REGULATION, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. Bertsch. Thank you. Chairwoman Capito, Chairman Bachus, and members of the subcommittee, I appreciate the opportunity to appear before you today to discuss the Federal Reserve's efforts to ensure a consistent approach to the examination of community banking organizations. Community banks play a critical role in their local communities. The Federal Reserve very much values its relationship with community banks and is committed to supervising these banks in a balanced and effective way. Developments over the past few years have been particularly challenging for these institutions, and the Federal Reserve recognizes that, within this context, supervisory actions must be well considered and carefully implemented. The Federal Reserve conducts its supervisory activities through its 12 Federal Reserve Banks across the country. This means that supervision is guided by policies and procedures established by the Board, but is conducted day-to-day by the Reserve Banks and their examiners, many of whom have lived and worked within the districts they serve for many years. We believe this approach ensures that Federal Reserve supervision of community banks is consistent and disciplined and that it also reflects a local perspective that takes account of differences in regional economic conditions. There has been much discussion recently about whether examiners are unnecessarily restricting the activities of community banks. The Federal Reserve takes seriously its responsibility to address these concerns, and working with the other agencies, the Board has issued several pieces of examination guidance over the past few years to stress the importance of taking a balanced approach to supervision. The Federal Reserve has complemented these statements with training programs for examiners and outreach efforts to the banking industry. In addition, the Federal Reserve continues to strongly reinforce the importance of these statements with its examiners and has taken steps to evaluate compliance with the guidance as part of its regular monitoring of the examination process. First, all examination findings must go through a thorough review process before being finalized. Local management teams vet the examination findings at the district Reserve Banks to ensure that problem areas are addressed consistently, findings are fully supported, and supervisory determinations conform with Federal Reserve policies. If these vetting sessions identify policy issues requiring clarification, local Reserve Banks contact the Board in Washington for guidance. In addition, Board analysts sample recently completed examination reports to assess compliance with policies. Potential deviations from policy requirements that are identified through this process are discussed with Reserve Banks and corrected as needed. Board analysts also review quarterly off-site financial surveillance reports with the Reserve Banks to ensure identified issues are consistently and promptly addressed. Board staff also conduct periodic reviews of specific examination activities. For example, recently we undertook a focused review of commercial real estate loan classification practices in the districts. We initiated this review to assess whether Federal Reserve examiners were implementing the inter- agency policy statement on commercial real estate loan workouts as it was intended. Based on this review, we concluded that Federal Reserve examiners were appropriately implementing the guidance and were consistently taking a balanced approach in determining loan classifications. Overall, our monitoring efforts to date suggest that Federal Reserve examiners are following established guidance in evaluating supervised institutions. However, if any banking organizations are concerned about supervisory actions that they believe are inappropriate, we continue to encourage them to contact Reserve Bank or Federal Reserve Board supervisory staff to discuss their concerns. We at the Federal Reserve are acutely aware of the need for a strong and stable community banking industry that can make credit available to creditworthy borrowers across the country. We want banks to deploy capital and liquidity, but in a responsible way that avoids past mistakes and does not create new ones. The Federal Reserve is committed to working to promote the concurrent goals of fostering credit availability and maintaining a safe and sound banking system. Through our ongoing communication with Reserve Banks and bankers, the Federal Reserve will continue to strive to ensure our guidance is applied in a fair, balanced, and consistent manner across all institutions. Thank you again for inviting me to appear before you today on this important subject. I will be pleased to take your questions. Thank you. [The prepared statement of Mr. Bertsch can be found on page 81 of the appendix.] Chairwoman Capito. Thank you. I appreciate the testimony and we will begin with questioning. Each member will have 5 minutes on the first round, and I am going to begin. I think the question I am asking could be appropriate to everybody, but it might be most appropriate to the FDIC witnesses. Being a resident of a different State and coming to Georgia and seeing 25 percent of the bank failures occurring in this particular region, my question is, what is different in Georgia? We know that the recession is a national one, we know that half of the houses in Las Vegas are in neighborhoods that are underwater. What is particular to Georgia in the regulatory review that causes it to have the greater share of the bank failures? Mr. Spoth. I am happy to start to answer that question, Chairman. It is a very thoughtful question and one that I think about all the time. What is it that happened in Georgia? And as I said, I lived here, I left in 2002, the second time that I was here living in the Atlanta area. What the numbers show, and what my feeling was at the time, was that Atlanta had, or more generally, the State of Georgia had high economic growth in the run-up to the housing collapse in 2007. Credit was available, readily available, for construction supporting that growing economy, and there were rising real estate prices. Not many expected the collapse of housing. Some of the issues that caused that collapse were masked in the non-bank arena through subprime mortgages and some similar issues. I think that is what happened. Why it affected Georgia more than others was probably, as a principal reason, the high amount of exposure to construction and development lending. Chairwoman Capito. Mr. Edwards, do you have another comment? Mr. Bret Edwards. I would concur with that, that is exactly right, the high level of construction and development loans on the books of the banks, especially as we got to the peak of the market, was a big factor. Chairwoman Capito. So that is different than what is occurring in some of these other high real estate areas-- Florida, Arizona, New Mexico, Texas? Mr. Spoth. It is somewhat different in scale. All of those States experienced a similar phenomenon with rising real estate prices. Chairwoman Capito. Right, right. Mr. Spoth. What was different in Georgia is that it had the highest concentration of construction and development loans relative to the capital base, compared to others. Chairwoman Capito. So then my follow-up question would be during that period of time when you were conducting reviews of these particular banks, that was not a red flag at the time? Mr. Spoth. It was a red flag. Maybe some of my other colleagues will talk about it. We issued guidance in 2006 to the industry talking about concentrations and risk management around commercial real estate and acquisition, development and construction lending generally. Would there be lessons learned behind that and mistakes made? Probably so. Chairwoman Capito. In the regulatory reaction, you are talking about? Mr. Spoth. Yes. The red flags were not always carried all the way through to the supervisory process. Chairwoman Capito. Mr. Bertsch, in our conversation before we began our testimony, you mentioned that you have sort of ridden through this tide before when you were in Boston as a regulator in the downturn of the real estate market in Boston in the early 1990s, and that you are seeing a lot--a lot of what you are hearing us talk about is a lot of what was talked about in the 1990s. What were the solutions at that time and, I guess, how do we find ourselves back in the same position, understanding that there are economic issues here on a national basis that are sort of more beyond control of community bankers in Georgia and others? Mr. Bertsch. I think a lot of what the regulators have been doing has been, to some degree, looking back in history to see what helped the New England crisis sort of slow down and how that was sort of addressed. I think if you look at, for example, the prudent commercial workout, commercial real estate workout guidance that all the agencies issued after the initial guidance that Chris referenced, that is basically designed to encourage banks to work with their borrowers and do formal restructurings of loans because that actually did work fairly well in terms of addressing some of the issues that occurred in New England. Now neither situation was very good for the banking industry. Just as now Georgia is experiencing a very high level of failures, it was similar in New England back in the late 1980s and early 1990s, and some of these same questions were being asked. But I think the thing we learned through the New England issue was that we need to give the banks an opportunity to restructure the loans and that if they restructure the loans, they can, some of them, can survive. But that does mean that some of them have to recognize some losses and some problems in some of the transactions before they can move forward and see those transactions come back to a performing asset. Chairwoman Capito. Thank you. Chairman Bachus is recognized for 5 minutes for questions. Chairman Bachus. Thank you. Let me ask the FDIC this question. Loss sharing agreements, obviously that has been a real focus and area of concern. My first question would be--and these are things we have heard from more than one source--is that banks who come in and take over these loans do not have the incentive to modify those loans when the borrower gets in financial trouble. There is almost maybe an incentive to close those loans out. And that is particularly problematic when there is a participation agreement I guess would be the word, between other banks on those loans. That is sometimes where we hear the complaints. Do you monitor those and is there a possibility of maybe-- or have you changed the way those are structured maybe to address that? Have you heard that before? Mr. Bret Edwards. Yes, we have heard that before and obviously it is a concern to us, because we took a lot of care in crafting those agreements as what we feel is the best solution to dealing with the assets coming out of failing banks. We do believe that the way the shared-loss agreements work, we share the losses, 80 percent with us, 20 percent with the assuming bank, we believe that gives them a pretty significant incentive, as we call it, skin in the game, to ensure that their behavior, their incentives in these agreements are aligned with ours--which is, we want them to pursue the least loss strategy for each and every asset. Additionally--and I will get to the monitoring in a second--I just want to make it clear that the agreement basically says they must manage the assets that they take in through a shared-loss agreement the same as their assets that are already on their books. So let us talk about compliance for a second. They do extensive reporting to us, we have compliance management contractors go out and do a thorough review of their compliance with these agreements. The agreement requires them to consider modifications in doing an analysis. So we have a bank credit, we look at all the disposition alternatives. If it is a troubled credit, they are required to do an analysis and demonstrate to us or our contractors as we go in to check with compliance, that they have documented, analyzed, and are following the least loss strategy on every credit. So we are relatively comfortable that the banks are incented to follow the least loss strategy--and they are also required to--and we also check that they are doing that. So I feel that is--but again, I have heard the same things and that concerns us and what I would say with respect to that is, if there are specific instances where folks feel that they are seeing behavior where that is not occurring, we would want to know about that. Chairman Bachus. Okay. Have you heard any complaints from other banks when there are participation agreements? Mr. Bret Edwards. Sure. With participation agreements--and again, generally what happens with those participation agreements is it depends on whether you are the lead participant, in other words you are the manager of that loan, or you are a downstream participant, as we say. Where the assuming institution is under a shared-loss agreement, they take the lead, from our perspective, again, the requirement in the agreement is they should be managing that loan just like any other loan in their portfolio and that includes, with respect to participation agreements, and I am sure my examination colleagues would tell you, they should be regularly and actively communicating with the other participants in that loan about what their disposition strategy is if it is a troubled credit, and follow the terms and conditions of that participation agreement. Chairman Bachus. I know that Congressman Westmoreland and Congressman Scott both mentioned mark-to-market. And I know that even in 2008, when we first ran into trouble, mark-to- market came up. Chairman Bernanke actually, within 6 months or a year, said mark-to-market is a problem. In some cases, it is exacerbating the problem. He testified probably on at least two or three occasions that it was a concern to the OCC, which has expressed concerns. In fact, we actually passed a provision that the SEC would look at the impact of mark-to-market and consult with the banking regulators. And they actually came out and instructed the accounting, the different accounting boards, to address the problem, which they sort of did in what has been called by many in the academic field a superficial addressing, because you had sort of a conflict between investors and the institutions as to what those assets were valued. Can you update me on any of your thoughts on mark-to- market? In fact, two former OCC Chairmen have testified that had mark-to-market been in effect in earlier recessions, there would have been many more bank failures than they had. And they were quite outspoken about that. I had a conversation with Don Powell--whom you are very familiar with--who headed up the agency, and he said that was a real problem. He had left the agency at that time. But would you comment on that? Mr. Barker. Congressman Bachus, I can tell you that from the examiner's perspective, when they go in and they conduct reviews of a loan portfolio, they are looking to see the ability of the borrower to make repayment. They look at the cash flow, they look at the current status of the loan, they look at the prospects for continued payment. In fact, the only time that mark-to-market would come into play is when the loan is no longer being able to be repaid, and then the valuation of the collateral comes into play. So it is at that point when the examiners would go beyond an assessment of the cash flow and make a determination as to whether there is sufficient collateral, and then apply mark-to-market standards as they exist right now, as part of their examination activity. Chairman Bachus. Okay. So you do not always follow mark-to- market in just determining whether a loan needs to be further reserved? Mr. Barker. We apply the standards first looking at the cash flow and the borrower's ability to make the payments. As long as those payments are continuing to be made, the assessment of the collateral position is very secondary, much after the cash flow analysis. Chairman Bachus. All right. That is good news, thank you very much. Chairwoman Capito. Thank you. Mr. Westmoreland? Mr. Westmoreland. Thank you, Madam Chairwoman. Mr. Barker, you mentioned in your testimony that you have a deep appreciation for the challenges of those bankers. Mr. Barker. Yes. Mr. Westmoreland. Have you ever been in the banking business? Mr. Barker. Only as a regulator, sir. Mr. Westmoreland. Only as a regulator. And how long have you been there with the regulators? Mr. Barker. I have been with the Comptroller of the Currency's Office for 33 years. Mr. Westmoreland. So you must have gone straight to work there after you graduated college? Mr. Barker. Yes, I did. Mr. Westmoreland. So you have never actually made a loan to anybody? Mr. Barker. No, I have not. Mr. Westmoreland. You have never been on the banker's side of the desk making a loan? Mr. Barker. No. Mr. Westmoreland. Have any one of you ever--since we have had 67 bank failures, how many times have you all been to Georgia to actually go into some of these banks or communities that have had the large number of failures? I will start with you, Mr. Spoth. Mr. Spoth. I have been to our--this microphone again. Chairman Bachus. These microphones are not as sensitive as those in Washington, so you might want to pull them pretty close. Mr. Spoth. I have been to our offices here in Atlanta. Mr. Westmoreland. No, I mean how many banks have you been to? Mr. Spoth. I meet with the bankers when they are in the Washington office. Mr. Westmoreland. How many local banks have you been to here? Mr. Spoth. Meet with Georgia banks in Georgia? Mr. Westmoreland. Yes. Mr. Spoth. I have not met with any in Georgia in recent years. Regional Director Dujenski meets with them all the time. Mr. Westmoreland. Good. Mr. Edwards? Mr. Bret Edwards. No, I have not. I assumed this position in January of this year. Mr. Westmoreland. Okay. Mr. Barker? Mr. Barker. I have met with several community banks in the State of Georgia as part of our supervisory process. Mr. Westmoreland. So you went physically to those that were being audited I guess or whatever? Mr. Barker. Yes. Mr. Westmoreland. And how many of those closed? Mr. Barker. Three of those banks have closed. Mr. Westmoreland. And so you went to three and all three closed? Mr. Barker. Yes. Mr. Westmoreland. Okay. Sir, do you ever get out much? [laughter] Mr. Bertsch. When they let me out, periodically I do get out. Chairman Bachus. He is out today. Mr. Bertsch. I have not been in any of the banks in Georgia. I would refer you back to our testimony that we do our supervision directly through the Reserve Banks and that is typically how our visits are conducted. Mr. Westmoreland. Okay. Now I know that the shared-loss agreements--Mr. Edwards, you spoke about them and I guess their intention, at least from what I am reading, is to soften the blow to the community. Mr. Bret Edwards. Yes, that is correct. Mr. Westmoreland. And I read in your testimony about--I guess it was your testimony, it did not have anybody's name on the front of it, but it talked about loss share, that they were open to modification and that you were willing to work with people and that the reason these shared-loss agreements came in was so the acquiring bank could go in and work with these different people to see if they could not save the loans; is that correct? Mr. Bret Edwards. Yes. Mr. Westmoreland. Okay, you need to get out more. And I hope you will stick around and listen to some of this testimony because that is not what happened. That may be what you all think is going on in Washington, but that is not what is happening here in our local communities, I can promise you that. You also mentioned, or somebody mentioned, that a large percentage--I guess it was you, sir--that a large percentage of the loans here were A&D and construction. And that is true. And I think Ms. Capito asked a question about how many--because of so many banks in Georgia, and we did have a large part of that. Did you ever take into consideration that because of maybe some type of a uniqueness, that somebody would need to come down here and look at it? And if that was recognized by the FDIC as being a problem, then you cannot manage all problems the same way? And if you recognize this, and I am sure it was much the same in Nevada where 40-something percent of their banks have closed, why wouldn't you come in here and look at maybe some special circumstances of the A&D and the construction loans? Mr. Spoth. As you know, we issued guidance from Washington about restructuring troubled real estate loans that was designed to reflect what was going on in Georgia, Florida, and some other States that have been mentioned here. We addressed how to restructure loans on the cash flow from the development or from the commercial property and to try and keep the borrower with that property. Mr. Westmoreland. How often did you inquire to how that process was going and how did you--when you looked at that process, how did you see it going? Mr. Spoth. We asked bankers and examiners whether they are able to follow the guidance. The particular guidance that I am talking about is about 19 pages long and has all kinds of examples in it. So we have asked people to go back and look at troubled real estate loans and see if the examiners-- Mr. Westmoreland. But from your personal experience, what has been the result of going back and doing these things? Mr. Spoth. Bankers tell me that they are more comfortable, and importantly, examiners too tell us that they are more comfortable working on restructured loans than they would have otherwise been without the guidance. Mr. Westmoreland. You need to stick around too. Mr. Spoth. I will do that, sir. Mr. Westmoreland. Now let me just-- Chairwoman Capito. Sure. We will do another round. Mr. Westmoreland. Okay, if I am going to get another round, I will yield back. Chairwoman Capito. Okay. Mr. Scott? Mr. Scott. Thank you very much, Madam Chairwoman. One of my favorite actors is Paul Newman and he made a wonderful picture called ``Cool Hand Luke'' and in there, there was this line that said, ``What we've got here is failure to communicate.'' And I think that--and I want to talk about that for a moment because we have Federal regulators in Washington, field examiners and then the banks. And they have not been on the same page. We have had complaints after complaints. And I think at the core of part of our problem here in Georgia has been just that. What have you all done to correct this, to address the concern that there has been a lack of communication between the Federal bank regulators in Washington and the examiners in the field? And in relationship to what they are doing on a consistent manner with the banks. Mr. Spoth. At the FDIC, one of the things that we did, having heard that, Congressman, is we informed our community bank advisory committee and had community bankers come to Washington and try to tell us their experience in their banks, in the field, and how it is with those they are representing, their peers. That has been very helpful; I have met with that committee every time they have been in Washington. That has probably been 7 or 8 times now they have come in. The other thing that we do--I talked about the commercial real estate loan restructuring guidance--is to have conference calls with bankers and invite them to participate. People like myself and the leadership that I work for participate on those calls with bankers and try to cut through the layers of communication that could break down somewhere. Mr. Scott. Let us just take one of those areas. We have come to the conclusion, I think you talked about the major cause, because I think we need to zero in on that, being that overleverage of bank foreclosures into the real estate and the construction area that caused a lot of what we have down here. So what have we moved or what are we going to put in place to make sure that does not happen again? Have we addressed that? Why didn't the examiners, why were they not able to communicate that as they examined the banks? Why were banks allowed to, if we knew that this would be a problem--some of them I think had 70, more than 70 percent of their portfolios were in this. Wasn't that a red flag going up? Didn't somebody see that? If not, have we moved in to correct that, to put something in place, some kind of triggering mechanism, something that would prevent that? Mr. Spoth. I can take an initial stab at that. One of the things that we think about when we see that is to recall--and I referenced earlier--how strong the Georgia economy was, and for the Georgia banks, the high capital ratios that existed at that time, say in 2006 and into 2007, and the high earnings. All this was largely driven by real estate, which masked the levels of exposure that were going on, both to examiners, I think, and to the bankers. So we look at techniques and perhaps go back to our 2006 guidance and see if there is something that we could or should do different there. What we know is that it is not necessarily the level, although we have talked about it some here, it is not necessarily the level of construction and development loans; it is also the management of risk around the loans. So it is a two-part story, and it is complicated, but I think that some of the solution is to look at risk practices. Mr. Scott. Let me just ask one because here in Georgia--I want to bring one incident to illustrate, particularly some of the requirements on what is known as asset writedowns. Let us just take the situation with a bank that was called Buckhead Bank, and it was run by a friend of mine, Charlie Loudermilk, who was the chairman and talked to me about that, to see what we could do. Is there a consistent procedure in place for asset writedowns in terms of the amount of cash capital that bank has to go and raise and are there too restrictive requirements on where they can go or cannot go to raise that capital? Because I think that is at the core of a lot of the problems with why some of the banks went down. There were very strong, stringent requirements on certain standards that might not--that it seems to me could have been adjusted. I think that some of these banks really had no business failing if we were more on the case and were adapting procedures that fit tough economic times as opposed to just bringing down the hammer. And one of those is the asset writedowns. And if we are going to get a troubled bank to have to go and to raise capital, there ought to have been some elasticity there. I do not know the particulars, but I think there is so much you could get from shareholders, or non-shareholders, there had to be--could you address that? Mr. Spoth. I will be happy to touch on that. At the beginning, what we try to do when a bank gets in-- Mr. Scott. Specifically, if you could refer to that case. I know somebody here dealt with the Buckhead case because if you did not and did not know about that, that is another part of the problem. Were you familiar with that case or the closing of that bank? Mr. Spoth. I am. I cannot recall right now the details of that bank. I would be happy to look into it and get back with you on the specifics of that case. I can talk generally about what we do when a bank's viability is threatened or when its closure is near because of its insolvency. I can talk about that kind of corrective program. I just cannot remember the story behind Buckhead at this moment. Mr. Scott. All right, before you leave, some of our banking friends come and tell us that they fear retaliation. Could each of you respond to that? What is that about? Why is there a fear among the bankers of retaliation just to come forward publicly? Where is this fear coming from and what is this retaliation? Mr. Barker. Congressman Scott, let me first address the comment itself, and I think that it is very understandable that examiners have considerable power, and each one of the regulatory agencies have considerable power over the institutions themselves. We have the opportunity to make recommendations to the board of directors, we have the opportunity to assess fines and penalties, to pursue enforcement actions. We have a great deal of authority over the institutions themselves. I think in recognizing that, there is concern about what will happen if there are disagreements or arguments over different opinions that are expressed during the course of an examination. But I can tell you in the strongest terms--and again, I operate in the Dallas office and supervise this region, that it has been emphasized a great deal that there is no retaliation that will take place in any of our supervisory activities. I am as concerned about that as I am anything else that we do. We have active involvement with the institutions themselves, with the bankers associations, I meet with the institutions, and we are very concerned about any kind of feedback or comments that would suggest any kind of retaliation. Mr. Scott. What would that retaliation be? How would any of our Federal regulators--each of you sitting there are regulators--what would be a retaliation? How would that happen? It is a part of the culture there, we hear it all the time, so we might as well get it out in the open so we can correct it, so we do not deal with it. What are some of the--could you describe an action that would be considered retaliation that our bankers would have to worry about, from an examiner? Mr. Barker. Again, I go back to concerns about what actions the regulators could pursue. For example, fines and penalties and violations and weaknesses could all be cited in an examination report. Again, we have a series of checks and balances that take place to make sure that does not happen. And again, I cannot emphasize enough that any kind of retaliation, it is a four-letter word, it is identified as something that we just will not allow to take place in any of the institutions. Chairwoman Capito. Would anybody else like to comment on that? Mr. Bertsch. I would just add on the question of retaliation, we take it very seriously too, and would not tolerate it. We have an ombudsman function in Washington that is separate and distinct from our supervisory function that can investigate any specific cases that people identify of retaliation. That ombudsman has the ability to investigate through the Reserve Banks and identify any cases that might rise to that and to take appropriate action if anything of that nature is identified. But as Gil said, and I know my other colleagues from the FDIC share this, we do not expect examiners to retaliate. We understand there are differences of opinion but we do not tolerate retaliation. Chairwoman Capito. Thank you. I am going to take the liberty of having another round. I am going to have one quick question. All three of you have mentioned guidance as a policy, guidance from Washington to try to spur lending. I know that guidance is different than regulation and this is maybe Washington bureaucratic speak, but it has great impact I think in terms of how it is carried forward. So I would ask you, how do you distinguish guidance from regulation, and then if guidance is a weaker form of regulation, more as an advisory opinion, how do you follow up with that in terms of your quality control to make sure it is consistent across all regions and all types of institutions and lending practices? So I will start with you, Mr. Bertsch. Mr. Bertsch. As I touched on in our testimony, we have done a number of things to try to look specifically at how the examiners are implementing the guidance. So one of the things we have to do is rely on our local reserve banks to monitor the work that the examiners are doing and take into account their knowledge of the local business market, their conversations with bankers, and make sure the examiners are taking a balanced approach to looking at loans. Beyond that, we have done specific testing to look at the particular area that seems to be raised most frequently, which is concerns about how we are treating commercial real estate loans. And so we took a look at a large sample of those loans across the country to see how our examiners were treating them, compared that to the guidance that we set out and make sure that the examiners were consistently following that. Chairwoman Capito. What did you find? Mr. Bertsch. We found that in our opinion, the examiners were carefully following that guidance. And in many instances were giving bankers reasonable and, for good reason, benefit of the doubt on loans that they reviewed when there were pending actions or there was additional collateral that was going to be offered, or things of that nature. So we conclude from that-- and we continue to test that--that the examiners are hearing the guidance and that they understand that we need to be careful to consider and listen to what the bankers have to say when we are making our classification determinations. And we think that the guidance is effective, regardless of the fact that it's not regulation, as you mentioned. Chairwoman Capito. Right. Mr. Barker? Mr. Barker. Madam Chairwoman, I guess the way I would respond to your comment is the difference between guidance and regulation, that specific point itself, because issuing guidance provides a lot of flexibility for the institutions to be able to take an approach and implement what the intentions and the objectives of the guidance actually is. So it is very much a principles-based rather than rules-based approach, which I think again allows the institutions to go ahead and adopt policies, develop business plans, and it provides them some flexibility in how they comply with the regulatory issuance that is out there. I think that is very important because banking is an innovative, creative process and we see that take place all the time and it is up to the experience of the examiners to make sure that guidance is being followed, that the risks are being identified and that the controls are in place to minimize that risk. Chairwoman Capito. Thank you. And then, anybody at the FDIC on that point? Mr. Spoth. I think I can probably comment for both of us there. The guidance does not have the force of law. Chairwoman Capito. Right. Mr. Spoth. It is a communication vehicle with the industry and our examiners, and during the tough times that we have here--particularly we are all talking about the same main three pieces of guidance--trying to convey a message to both the bankers and the examiners about what the expectations are. So we expect sound loans to be made. Chairwoman Capito. I expect we will hear from the second panel that in the three guidance areas maybe the guidance is, on the one hand, one thing, and then when the rubber meets the road, so to speak, it ends up converting into something else. I will just make a quick comment and then go to Mr. Bachus. When I hear bank failures and folks taking over assets, it is consolidation. We just went through too-big-to-fail in a big way in this country and certainly the community banks were not the problem. But I, as chairwoman of the Financial Institutions Subcommittee, am beginning to get very concerned about bank consolidation, because from what we are hearing, the institutions are getting larger and larger. And from a lessons- learned aspect, I am not sure--I need to be assured that is the direction we need to go and that you all as regulators are overseeing this as a potential red flag. So I just put that out as a comment, a source of concern. I think most of my colleagues share this and certainly some of the controls that were put in place in Dodd-Frank, whether it is the FSOC or some other things to look at, kind of over the horizon, systemic risk areas, are still very unformed and, I don't know, they do not make me sleep all that great at night. And then when you see the markets just going crazy here, particularly with the financial institutions, it is a source of concern. Chairman Bachus? Chairman Bachus. Thank you. I would say this to the regulators, but also to the audience, it is very difficult here on Main Street, the environment, the demographics, the economy, the loss of jobs. It is also, I think, a very difficult time for regulators and they have many challenges there. You will hear sometimes as a Member of Congress conflicting information even from the bankers or from the borrowers. You talk to a borrower and sometimes he will say that the banks say the regulators don't want me to make that loan. And let me say this, it is not up to a Member of Congress to tell people or encourage people to make loans or not to make loans. That is certainly not our job, ethically. But when we have made inquiries as to just what is the situation here, a lot of times the bankers tell us that they do not want to make the loan and they actually do sort of shift that by saying--and it is an easy answer to say--we are afraid of the regulators. And that is often the case. I know many bankers will maybe tell you that is not the case, but I have had some of them who have said that is the case. Not that they intentionally do that, and maybe it is someone, a loan officer who is saying that, not someone in management. Mr. Barker, you, as a District Director, are in the banks quite often. And I think Mr. Westmoreland mentioned something-- Mr. Spoth--and Mr. Edward, you have been on the job since January--and you are actually in Washington and you supervise the District Directors, so they are going into the banks. But I think maybe Mr. Westmoreland has hit on something in that I think--I believe it could be beneficial to sometimes go with the District Directors or even the bank examiners and listen. Oftentimes, my staff will meet with constituents and then I will talk to constituents and the staff will think they are getting the message, but I may actually say, I think we can do something. I would actually encourage you to do that because we sometimes don't--at the Washington level, they say they are sending a message to the bank examiners, the bank examiners on the local level sometimes feel as if it is Washington, that if they do something, they may have a problem with Washington. And it is very difficult for us as Members of Congress or for bankers or for borrowers to know exactly if there is a problem or where there is a problem. I will close by saying that--and I know for many of the bankers here, this may not be a popular thing for me to say, but I am going to say it anyway, because I do not run in this district. [laughter] One of the bankers in my district who was the most critical of the bank regulators, vehemently critical, and was always calling with various examples of overreach, I had been told a year before by other bankers that that bank had done all sorts of imprudent lending and that there was no way they were going to pull out. And they were closed, at a considerable loss to the taxpayer and to some depositors who, during that period of time, came in and deposited money above what their protection rates were. And to the last day, I was being told that this bank was in great shape, by the management. But everyone else realized that was not the case. That is human nature to say that someone else caused your problem. The bottom line is the regulators may have made mistakes, but I do not think in many cases they forced the failure of banks. They may not have done everything that they could have, they may not have done a perfect job. And I worry going forward the level of regulation and the cost of regulation and Dodd-Frank is going to--the interchange fee on debit cards, of all things, which impacts community banks particularly--is going to be another hurdle for our community banks. And I know the Fed has been outspoken on that and very concerned about it, that it would be a problem. Credit cards were not addressed on the interchange fee. Those are the seven largest banks. So we have had--that provision that only dealt with debit cards is going to make the--it is not a level playing field between our community banks, regional and community banks, and our largest institutions. So I would just simply say to you I think more communication always helps. I appreciate the fact that the FDIC sent its top people from Washington. It was good that we had a District Director from the OCC because it is a slightly different point of view, and I think they were both good. But I would encourage you, with Mr. Westmoreland and Mr. Scott, to look at their legislation, offer comments to them, if you have a provision that you think is a problem. But if you can work with them on this, at least sit down and see if you can agree. I appreciate your attendance today and it is not--we are not one big happy family, we are never going to be, but we are all Americans, we are all concerned about the economy, we all want the financial system and the American people to prosper. So we are all on the same page, we all want the same goals. But as you will probably find out on this second panel, they do not consider you family. But they should not, because you are not there to--you have a duty you have to discharge. It is not always popular, but I do--as I appreciate the challenges with the bankers, I appreciate the challenges you have, too. I have no further questions. Chairwoman Capito. Thank you. Mr. Westmoreland? Mr. Westmoreland. Thank you. To the gentlemen from the FDIC, can you both confirm to me for the record that no one on the FDIC asked any Senator in the United States Senate to hold H.R. 2056? Mr. Spoth. May I take some liberty with that question, to offer our support. For one, we think it is the right thing to do, to have our Inspector General and anyone else look over the FDIC's operation. We support that initiative and are happy to work with it. Mr. Westmoreland. So if anybody told us that, they were mistaken? Mr. Spoth. I would not know about that. Mr. Westmoreland. All right. Mr. Barker, in your testimony, you said, ``Thus, a key part of our job is to work with bankers to ensure that they recognize and address problems at the earliest possible stage when remedial action is likely to be most effective. The simple truth is that seriously troubled banks cannot effectively meet the needs of their local communities.'' And you testified or spoke that you had gone I think to three banks that eventually went. What prior steps had been done, what remedial actions had been taken to get them back on the road I guess to recovery. And how long back had those remedial actions been put in place before the failure? Mr. Barker. I think that in every single case where we have a bank failure, examiners are responsible for conducting examinations on a routine basis, based on the size of the institution. Once we identify problems at an institution-- Mr. Westmoreland. But how many of those banks--had there been problems identified with those banks that you visited? Mr. Barker. Yes. Mr. Westmoreland. And how far back had those problems been identified? Mr. Barker. Varying degrees. Mr. Westmoreland. Okay. Because we have bankers telling us that the OCC comes in and they get an A+ on their report card and then the next report, they not only get an F, they are called everything but a felon. How often do you do examinations on banks? Mr. Barker. Depending on the size, either 12 or 18 months. Mr. Westmoreland. Okay, 12 or 18 months. So, one year, you make all A's and then the next year, you get F's, you are called everything but a felon and you make a D in conduct. Now somewhere, somebody missed those remedial steps I guess, because I don't know how it goes from an A+ to an F in 12 months. Mr. Barker. Let me say a couple of things. One is that the uniqueness of the Georgia markets included, as was spoken before, the size of the concentrations in commercial real estate and I think what has not been spoken is the significant economic impact that hit at one particular time. In the past, it was a slow downturn or the economy slowed, but it was just a significant economic event that just completely shut down the markets in Georgia. So it happened very, very quickly. As part of our supervision, we not only examine banks once every 12 or 18 months, we have quarterly contacts with the institutions. And the purpose is to do those very things, to highlight trends in financial condition, to talk about new products and services-- Mr. Westmoreland. I understand. And I am not trying to cut you off, but some of these loans that are now F's were A's. It is just hard for me to believe a loan goes downhill that fast, especially when it is a performing loan. But I want to get back to the FDIC because I know we are running out of time. How often do you take a performing loan with a failed bank, and when it comes into receivership of the FDIC, how does it become a non-performing loan? Mr. Bret Edwards. Are you talking a bank fails and the loan-- Mr. Westmoreland. The FDIC took over as a receivership. Mr. Bret Edwards. Okay. If a performing loan goes into receivership, it would depend on where it gets managed obviously, but you are asking how it would become non- performing? Mr. Westmoreland. No. What do you do with it? Mr. Bret Edwards. With a performing loan? Mr. Westmoreland. When a performing loan comes in. Mr. Bret Edwards. Sure. Again, we have tried to use the whole bank structure as much as possible, so the performing loan would be sold to the acquiring institution and become an asset of that institution. Mr. Westmoreland. The FDIC is the receivership--no? Mr. Bret Edwards. Okay. If there is no acquiring institution, then we would take that onto the receivership's books and we would manage it--either manage it ourselves or package it into a package to sell, or perhaps to put into a limited liability structure to have-- Mr. Westmoreland. Okay. But the rules and regs that we are supposed to be, as the chairman said, at least applying consistency, if you go in and put a bank in receivership yourself, you work out these loans or at least you should be following your own guidelines to work out these loans, but isn't it true that most loans that the FDIC wants to modify, they want 50 percent of loan to value? Mr. Bret Edwards. I am not familiar with that requirement. Mr. Westmoreland. Okay, so that is not a requirement? Mr. Bret Edwards. No. Mr. Westmoreland. That it would be 50 percent. So you would be more than willing to help somebody with a loan that the FDIC had, to soften the blow, to do what you are encouraging other banks to do, to have shared-loss agreements, you would be willing to go in and do that? Mr. Bret Edwards. What I described earlier about our expectations on acquiring institutions when they take over these loans under a loss sharing agreement, we follow exactly the same standard. We are going to look at a performing--if a loan becomes non-performing, we are going to look at the alternative disposition strategies and we are going to follow the one that we believe is going to minimize the loss. Mr. Westmoreland. Okay. Let me follow up for just a minute here. With Rialto being a partner of the FDIC, Rialto is a group of people, I think out of Florida, that has partnered with the FDIC, correct? FDIC, 60 percent partner? Mr. Bret Edwards. That is correct. Mr. Westmoreland. They are 40 percent. They purchased $3.2 billion worth of loans I believe from the FDIC--and you are a partner, right? Mr. Bret Edwards. Yes. Mr. Westmoreland. --for about 40 cents on the dollar. Mr. Bret Edwards. Okay, yes. Mr. Westmoreland. And I think the actual money they put in cash, 300 and some million dollars, was about 8 percent of that, right? Mr. Bret Edwards. Okay, yes. Mr. Westmoreland. And you are a partner with them? Mr. Bret Edwards. Right. Mr. Westmoreland. It is zero percent interest for 7 years, is that correct? Mr. Bret Edwards. I believe that's right. Mr. Westmoreland. So the taxpayers--let me get this straight, we are a 60 percent partner and we took on another entity, an LLC. They got the stuff with just cash money for about 8 percent down, right? Would you do that for anybody else out in the audience there who wanted to do that? Mr. Bret Edwards. When we put those LLC structures together, we put-- Mr. Westmoreland. No, I am just asking you, would you do that with anybody else out there? Mr. Bret Edwards. Anybody who is qualified to bid on those kind of structures. When we put those-- Mr. Westmoreland. So if they had 8 percent of what the deal was, you would take them on as a 40 percent partner? Mr. Bret Edwards. As long as it is the highest bid for the-- Mr. Westmoreland. I am sorry? Mr. Bret Edwards. When we put those deals together, we take those assets, put them together in a pool, we bid them out competitively. Mr. Westmoreland. Okay, so your 40 percent partner was just lucky to get the bid? Mr. Bret Edwards. We think we do an excellent job of marketing these things-- Mr. Westmoreland. I know, but I am just asking you. Mr. Bret Edwards. Yes. Mr. Westmoreland. Because it sounds like a sweetheart deal, and all these people may want to get involved with you to be able to do that. [applause] Mr. Westmoreland. And let me ask you this-- Chairman Bachus. It was bid, though. Mr. Bret Edwards. Correct, that is absolutely right. Mr. Westmoreland. I don't care. With all due respect, Mr. Chairman. Chairman Bachus. I know. Mr. Westmoreland. When you go and buy other people's loans that are supposed to be in the constant consistency of what we are doing, that is supposed to soften the effect on the community and work them out, now they are auctioning them off. And let me go one step further. Typically, you would foreclose on a property if it was a non-performing loan? Mr. Bret Edwards. If that is the best disposition alternative after we have done the analysis. Mr. Westmoreland. Okay. Would the best dispositional thing to do be to go immediately to court and file for a judgment and let the borrower continue to accrue interest and let the borrower be responsible for the taxes, rather than foreclosing and taking the property over and putting it back out and selling it. Would it be the FDIC's decision, since you are a 60 percent partner, to go to court first and go after these people personally, because we are wanting to do a consistency of the regulations? So it is the FDIC's position that their managing partner go to court first, sue these people personally, try to get control of the property and even though they have control of the property, the borrower is still responsible for the taxes and the interest? Is that what I am hearing from you? Mr. Bret Edwards. It sounds like this is a fact-specific situation. I would be happy to talk to you about that. Mr. Westmoreland. You know the situation, I mean it is Rialto. Mr. Bret Edwards. Right. I will tell you that the LLC structure has served the FDIC well. We take the loans-- Mr. Westmoreland. You are a 60 percent partner. Mr. Bret Edwards. --we put them out for bid. Mr. Westmoreland. You put them out for bid and then do you tell them to go straight to court? I am not going to argue with you here, but we are going to look further into this because I am telling you, there is something that is not right with it. [applause] Mr. Westmoreland. And we are going to continue to pursue it. Chairwoman Capito. Mr. Scott? Chairman Bachus. Mr. Edwards may want some time to explain. I know he was kind of-- Chairwoman Capito. Mr. Edwards, did you have another response? Mr. Bret Edwards. Again, let me just explain. Our LLC program is essentially designed to keep as many of the assets in the private sector, just like the shared-loss program is. If we are incapable of getting a loss share deal or a whole bank deal first of all and then a shared-loss deal, we then take those assets back onto the books of the receivership. Rather than manage those assets ourselves with our own employees, we put these assets into an LLC structure. These equity partners bid competitively to get a piece of that deal and then they have their own capital at risk. Again, they are putting up substantial amounts of capital, these are not--these are some of the most poor quality assets we have and they are incented to follow the same disposition strategies that we would or our loss share partners would. It is their money at risk, they are going to follow the disposition strategy that has the highest net present value for that asset. Chairwoman Capito. Thank you. Mr. Scott? Mr. Scott. Thank you. Let me ask you, are there any banks now currently, in your opinion, or your understanding, that are in trouble or close to closing now that are under review? Mr. Spoth. Yes. Mr. Scott. And how many would that be? Mr. Spoth. The problem bank list has 888 on it, it has been trending down some. Not nearly all of those do we expect would fail. There is a subset of those, there is a possibility that some of those could fail, not all of them will. Mr. Scott. But relative just to Georgia, how many? Mr. Spoth. I do not have that information. Mr. Scott. But there are some? Mr. Spoth. There are banks struggling in Georgia, yes. Mr. Scott. And if you had to put your hand on one basic area that was a causal effect, what would that be? Why? Mr. Spoth. This is still the workout of the overhang in the real estate markets. Mr. Scott. One of the problems that we have that I would like for you to address is that we get to hear from our friends in the banking community when we ask them to lend more. We faced it most recently, a lot of closing of car dealerships, for example, and their biggest problem was we would go to the bank, we could not get the money, we would go to the bank and when we get to the bank, the bank would say, we are not lending, we cannot lend because of the overly restrictive standards and application of regulations that the FDIC, the Office of the Comptroller, the Fed, all the regulators, examiners, are putting on us. Do you agree with that? Is that a fact? Mr. Spoth. No. I do not doubt that it is a fact that you are hearing it, but I do not think that it is a fact that it could be occurring that way. Mr. Scott. You mean you do not feel that what you are doing is hindering the banks from lending money? Mr. Spoth. That is correct. Mr. Scott. Why would they say that it is then? That is what I mean; there is this disconnect. We cannot get the banks to lend because they say you are putting so much pressure on with these restrictions that they cannot lend and then you say these restrictions can. So something has to give, we have to get the money out into these small businesses. Mr. Spoth. I think this may go back to the chairman's point about the guidance and the like. This is why, along with the other regulators, we would put out guidance that we are encouraging loans to creditworthy borrowers, and that goes right to, if it is a car dealership, do they have the ability to cash flow whatever kind of loan that they are applying for. We are happy to see those kinds of credits made. Mr. Scott. But let me just ask you, what are these restrictive standards? What would they be? What are the bankers talking about? I do not think they are just making this up. There has to be something that you are doing. What is it--I am trying to get at a point, not sort of he said-she said, but what in your opinion are they talking about in terms of these restrictive standards? Mr. Spoth. I will try to work with you on that. It is a communication piece, I think. The only banks that are restricted on the amount of lending that they can do, unless it would be State law, there are limits on how much you can lend to any borrower, but setting that aside, the only restrictions that are on banks are banks that are in serious trouble, and we usually have a formal or informal agreement with them about how they plan to work out their problems. Even then, you would not usually see the kind of restrictions that you may be hearing about. Mr. Scott. Let me ask one for you to respond to. There have been complaints about the consistency of procedures used by examiners for appraising collateral values. Is that, in your opinion, legitimate? Is there a problem of not being consistent in applying those procedures? Mr. Spoth. Our procedures at the FDIC, and I think the other regulators as well, are to review the appraisals that the bank itself has gotten. So you would not be expecting, and you would not see, a bank examiner conducting appraisals. We may ask about an appraisal or an evaluation that a bank has in its files, but-- Mr. Scott. And so you do not see, there is no legitimacy to the concern that there is inconsistency in the procedures? Mr. Spoth. I don't think there is inconsistency in the procedures, but I do hear the concern. It is certainly true that there is a concern about that. We put out guidance specifically on this issue. I think it was in December of 2010 that we reissued appraisal guidance. Mr. Scott. What about the factors that the examiners consider when assessing capital adequacies? Mr. Spoth. The assessment of capital adequacy is a case- specific situation, according to the risk profile of the institution, unless they are not meeting the absolute minimum standards of the regulation. So there is a minimum standard, as you know, and there may be a requirement above that, depending on the risk profile. Mr. Scott. What about the impact of the cease and desist orders? Mr. Spoth. This is one that we do hear a lot about when banks are in troubled condition. We try to work with the bank management to reach a bilateral agreement, which would include, if we agree, that an increase in capital is necessary, and we try to agree with the bank on what that number should be. And we think what that leads to is a consistency of approach. If the bank has to talk to their existing shareholders or new shareholders, what exactly is the road map forward. So if we can agree on an order, which we do substantially all of the time, everybody knows what the road map is to avert that failure. Mr. Scott. Okay. And so what would you say, because the bankers are going to come up here and speak in the next panel, I would like to give you an opportunity, what would you say--we have asked questions here, and there are two thoughts of opinion here. There are areas of disagreement. I think you saw and heard some of the reaction from the audience with their applause in making a point, but there seems to be some difference here. You are the examiners, you are the regulators, they are the banks. What would you say to the bankers, what do they need to do that they are not doing, and where are some of the miscommunications that are taking place, because there obviously is miscommunication here? How would you address that? Mr. Spoth. I would just stipulate that these are the very toughest conversations that a regulator and a banker can have, if the bank is in a seriously threatened condition. Investors could lose money, borrowers, communities could potentially lose their local community bank. These are the very toughest conversations you can have and you would expect that informed people on both sides of the table would be trying to come to a solution. And I believe that is the case substantially all of the time. So it is getting around to just what you are asking, what needs to be done. Usually if capital has been depleted, it will need to be replaced at some level so that the institution has time to work out its issues. Mr. Scott. Yes? Mr. Barker. I would like to make a couple of comments. In my experience over the years, we have difficult times like this, but there are institutions that not only survive, but those that thrive. And there are two elements in those two individual cases. One is a management team that recognizes the issues and is prepared to address them. The second issue is having access to capital in order to have them last through the difficult periods. The access to capital is really a key. But I think what I would pass along to the bankers who are coming up next is as examiners, our window into the bank, our window into their borrowers is through the credit files and through the discussions of management. So the best they can do is to help us understand what the situation is, help us to see the things that they see, have that dialogue, and the communication is critically important to us making accurate assessments. Mr. Scott. Finally, I don't want to take up too much time, but Congressman Westmoreland and I are working on this bill and in the legislative process, you are always looking for vehicles. And while the paramount purpose of this bill is to really get a good study and get some answers to questions, and we can also use this--as a result of this hearing, there may be some things that come about where we can improve the situation and that is why I really asked those questions about some of the points and some of the concerns that have been raised. And I would hope that you all would have an open mind here that as we get back, the bill gets over to the Senate, that we might be able to add one or two items into this bill that can be executed to help with one or two of these problems. Would you all be amenable to that? Mr. Spoth. Yes. Mr. Scott. Okay, thank you. Chairwoman Capito. All right, thank you. I want to thank the first panel. I think we have had a very good discussion. I want to thank you for traveling to Georgia and I want to thank you for-- Mr. Westmoreland. May I make one comment? It will take 5 seconds. Chairwoman Capito. He said 5 seconds. Mr. Westmoreland. Mr. Edwards, could you just get me a list of every entity that the FDIC is in partnerships with? Mr. Bret Edwards. Absolutely. Mr. Westmoreland. Thank you. Mr. Bret Edwards. Absolutely. Chairwoman Capito. And also, I would like to echo the chairman's comments in terms of thanking you for your service in the financial sector, I know sometimes it is not easy work, and we appreciate that. You have certainly had lengthy service there. My final comment before I call the second panel up would be that one of the big solutions to a lot of the issues that we have heard today is a roaring and vibrant economy. And this is something that we are all four here tasked with, but so is everybody in this audience. So I look forward to those days in other such hearings. Thank you all very much. I will dismiss the first panel and I would like to call up our second panel of witnesses. We will go ahead and get started. If everyone could take your seat quickly, we will go ahead and start the second panel. They have been very patiently waiting. I know the chairman will be back in the room--there he is. Chairman Bachus. Madam Chairwoman, Mac Collins, who was a colleague of mine, we came into Congress in 1992 together--Mac, would you stand up? You represented this district? Mr. Collins. I had the pleasure of representing this district for 12 years. It is in good hands now with Lynn Westmoreland. We appreciate you all being here; this is an issue that really needs to be addressed. There are a lot of problems around the country with our community banking system and I do think a lot of it has come from the regulators. In fact, I know it has. And I appreciate you all being here, and I appreciate them being here and facing up to the issue, too. You all take care and have a good day. I hate to beg off, but I have to go to Forsyth for a conference. Chairwoman Capito. Thank you, Mac. Our colleague, Mr. Scott, probably will be coming in here shortly. So with your permission, I am going to go ahead and start. I will introduce each panelist individually for the purpose of giving a 5-minute opening statement and then we will get to the question portion. Our first witness is Mr. Chuck Copeland, who is the CEO of the First National Bank of Griffin. Welcome. STATEMENT OF CHUCK COPELAND, CEO, FIRST NATIONAL BANK OF GRIFFIN Mr. Copeland. Committee Chairman Bachus, Subcommittee Chairwoman Capito, and Representative Westmoreland and Representative Scott in absentia, welcome to my congressional district and thank you for affording me the opportunity to provide my comments during these times which have been so detrimental to our communities. First National Bank of Griffin is a 78-year old community bank chartered in Griffin, Georgia, in 1933, literally rising from the ashes of the 1929 financial collapse, to serve the citizens and merchants of our community. For all of these 78 years, service to and access to credit for our citizens and merchants have been our principal tenets of business. Being located less than 50 miles from downtown Atlanta, our community has served as a long-time bedroom community for those commuting daily into Atlanta for work. As such, as the metro Atlanta economy prospered in the 1990s and early 2000s, the demand for housing in our banking markets blossomed. Being a community bank, we responded to this by providing both construction and development financing to many of the builders and developers. We provided responsible conventional long-term mortgage financing to many of the home buyers through our longstanding, direct-delegated authority through Freddie Mac. We did not knowingly participate in the subprime game of hybrid loan structures and perilously relaxed mortgage underwriting standards and we often questioned the soundness and appropriateness of those activities. What we failed to anticipate in our risk management practices at that time was the degree to which this subprime activity was propping up the unprecedented demand for new housing our market was experiencing. We also failed to understand the degree to which misrepresentation and manipulation were masking huge fundamental flaws in the mortgage securitization market. We monitored our concentration risk in the areas of residential construction and development, comparing our levels against the regulatory guidelines, and against the levels of our market peers. Due to our 7 decades of retained earnings and careful and prudent past dividend policies, our higher than peer capital levels helped mitigate our risks, and our concentrations in these loans as a percentage of capital generally came in at the lower end of our market peers, which was not substantially out of line with regulatory guidance. Regardless of these circumstances, no amount of forward analysis or stress testing anticipated the depth and length of the real estate housing collapse we were about to face in the closing months of 2007. We were early to recognize our problems, mainly due to the fact that we had used loan structures which were more stringent than many of our peers. We commonly required hard equity and monthly payment of interest on our construction lines. In addition, it was the exception where we permitted borrowers to draw funded interest reserve to carry their development loans. Because of these practices, in many cases, we knew our problems the first time a monthly payment was missed as opposed to not discovering the depth of the problem until loan maturity. In spite of these efforts, the pace and magnitude of the residential collapse quickly overwhelmed our early warning devices. We are a core-funded community bank. As we entered the recessionary cycle, we enjoyed the number one deposit market share position in our home market and had no wholesale or brokered deposit funding on our balance sheet. In spite of the significant credit stresses we have endured over the past 4 years, we continue to demonstrate an underlying core earnings stream. In other words, once the cloak of this real estate collapse is finally lifted, our bank can not only survive, but prosper for another 78 years. I recognize that the title of this hearing is, ``Potential Mixed Messages.'' My frustration is not so much one of mixed messages, but one of changing messages. As this cycle began, we sensed a reaction from our regulator of supportive cooperation. They knew our bank. Many of the field examiners had been in our bank through multiple exam cycles for as long as 25 years. The general message coming from examiner comments in 2008 was one of acknowledging that the same core fundamentals which had sustained our bank for decades were still evident, but that we had become victims of an unprecedented real estate market collapse. The beginning of the shifting message became evident when we received our written reports of examination, and many times the narrative seemed more harsh than the discussions. Unfortunately, it is the written narrative which becomes the written record, and the document by which we will all be judged in history. Did we have a role in setting ourselves up to become victims? No doubt. But did we recklessly pursue growth and earnings at all cost with no regard to the other elements of our mission? Never. Fast forward to subsequent exam cycles and we have found the field examiners less willing to disclose conclusions and very guarded in acknowledging progress in those areas where we had been performing well. These are many times the same examiners we have worked with for years. We understand that this is not a personal affront; it is simply this environment of second-guessing and weariness in which we are all operating. But as the field examiners have become less comfortable in making casual assessments of progress or acknowledgement of bright spots within our banks, such as our extreme customer loyalty and core funding, the written reports of examination have taken on a clear pattern of excessive criticism and legal edification. So much so that one can find nearly contradictory statements within the same paragraph or section of a current report. We understand our shortcomings, and you can rest assured that we are working diligently to improve our banks in the areas we can control and influence. But, the inflammatory and demoralizing tone found in many of the examination reports only tends to send us clamoring for cover. We are trying to improve our banks and preserve our chances of survival, not because of heightened rhetoric or threat of repercussion, but because for most of us, our banks are a substantial part of our being. We are the ones leading our community's economic development activities and trying to attract jobs for our citizens. We carry the daily weight of knowing the importance of a paycheck to the roughly 100 people we employ in our bank. This is bigger than pride, deflection of responsibility, or self-preservation. I have observed some of the testimony of the regulators and the academic experts in earlier hearings on the subject of regulatory practices or behavior. A recurring theme seemed to be the position that forbearance in regulation is inappropriate and would only lead to greater potential losses to the fund. I would argue that forbearance is a necessary and logical part of any healing process. And that is exactly what is taking place in our banks; we are attempting to heal our banks, our local economies, and where salvageable, our borrowers. That is why I support the flexibility being offered in some of the proposed legislation such as smoothing out the effects of loan and asset impairments resulting from declining real estate values. The current methods of write-down being employed today have the potential to wipe out all of the capital in our banks with no chance of living to see the eventual real estate market recovery. Unfortunately, by that point, our community will have been stripped of a valued commodity. My bank and its resources will have been extinguished and the beneficiary will be a faceless, opportunist investor with no ties to my community. Chairwoman Capito. Mr. Copeland, could you kind of summarize the end there? Sorry. I'm trying to keep it in a reasonable timeframe. Mr. Copeland. Certainly. In spite of the imperfections and the public's general distaste for it, I was an early proponent of the TARP program. Unfortunately, our bank was not allowed to participate in that. This has created a system of two different classes of banks: those that can afford to and are motivated to dump problem assets at substantial discounts; and those of us who are clinging to our remaining capital like a shipwreck survivor clinging to debris. Theoretically, had we received the TARP funding which the funding formula indicated we were eligible for, our current leverage ratio would still be at a respectable 8.25 percent and our total risk-based capital at 15 percent. And with that theoretical capital level, I am sure it would be much easier for my bank to attract additional shareholder investment to bring us into compliance with the regulatory order my bank entered into with the OCC almost 2 years ago. The capital cushion would add badly needed flexibility as we consider loan requests from borrowers and we would find ourselves in a position to operate our bank for the benefit of our community, its employees, and the broader economy, as opposed to the regulatory paralysis which we suffer from today. Cycles eventually come to an end. We have endured this one for 4 years. We realize that much of what has been done cannot be changed or its effect reversed. We kindly ask that through forbearance and flexibility, our regulators give us time and support us as we try to lead our communities to recovery. Thank you for your time. [The prepared statement of Mr. Copeland can be found on page 89 of the appendix.] Chairwoman Capito. Thank you. Our next witness is Mr. Michael Rossetti, who is president of Ravin Homes. Welcome. STATEMENT OF V. MICHAEL ROSSETTI, PRESIDENT, RAVIN HOMES Mr. Rossetti. Thank you, Chairwoman Capito. I would like to welcome you and Chairman Bachus to Georgia. And Lynn Westmoreland, David Scott, it is good to see you guys again. I sincerely appreciate the honor and the opportunity to testify before you on this subject. It is my opinion that our Representatives genuinely want to foster and promote a healthy banking environment so that citizens and businesses can prosper. I have been directly involved in the banking business as a director since 1999. And my primary business, as Chairwoman Capito mentioned, is homebuilding. I have owned and operated Ravin Homes for 30 years. In your letter inviting me to testify, the first two bullet points request comments on the policies and procedures of the FDIC and whether they are being applied uniformly across the country. Although I have read about certain banks getting favorable treatment from regulators, I can say that my experience has generally been that they have acted reasonably with our bank. The problem is with the regulations and the lack of common business sense used in the interpretation of these regulations. We are being regulated so heavily that we cannot function as a facilitator in the community. When Sarbanes-Oxley was implemented, our bank decided to go private so we would be exempt from the duplication of regulatory reporting. We were already performing the regulatory requirements of the FDIC. The costs and manpower required to do redundant reporting under Sarbanes would have been crippling to our institution. Now, we have Dodd Frank to contend with. This a 2000+ page bill that will have 10 times the regulations attached to it after bureaucrats get through with writing all the rules. I see more of an issue with the amount of regulations rather than the regulators. We are being regulated to death in all of our personal and business lives. Your next point of interest concerns regional economic conditions and adjusting exam standards. In my banking world, as well as most banks in Georgia, real estate loans, which we call AD&C loans, were and still are a large part of our portfolios. In accumulating these large portfolios, the bank's customers were simply supplying the product that the Federal Government, through Fannie Mae and Freddie Mac, were giving away money to buy. The current huge overhang that this created in all levels of housing development is going to take years to work down. If the regulators were able to adjust to this fact and be less onerous on banks to write down loans, I believe that the liquidation of assets would be more orderly and more lucrative and create considerably less stress on our banks. I will have more on this when I discuss loss share. The second to last point of discussion concerns safe and sound operation of banks while promoting economic growth. In my mind, there are two entities that need to be considered in the economic growth equation for this topic--the banks and their customers. At the present time, we are restricted from doing any new AD&C lending, no matter how secure it is, due to the concentration limitations imposed by the regulators. We cannot take advantage of doing a good loan and the customer cannot find a bank to do that same loan. Both get hurt and the economy loses jobs and suffers. My grandfather told me when I was younger that there were only two ways to get out of debt: stop spending; and start making. If banks are going to survive, we need to make a profit. And the only way that banks make money is to lend it. Right now, we are prevented from doing that. Banks that are in this position, basically community banks, are completely defensive in this arena. As of this date, we do not lend unless it benefits the bank in the disposal of foreclosed property. New loans to new or existing customers do not exist at our bank. I would respectfully request that you investigate H.R. 1755, the Home Construction Lending Regulatory Improvement Act. It addresses this issue and several other regulatory issues that are very germane to our discussions here today. Now we have the last point in your letter, and my favorite--winding down failed institutions and the liquidation of assets by the acquiring institutions, which we will call loss share. This shared-loss agreement allows banks to operate completely outside of normal banking policies because they are guaranteed to make money, no matter what they sell the asset for. The same banks operate completely differently--and I have found this directly and heard this from other people--they operate completely differently under a loan that was originated in their original bank. To add insult to injury to our bank and the community, they will dump the assets acquired at a rock- bottom price, thereby destroying local property values. In my opinion, loss share has done more to destroy property values than any other economic factor in this downturn. Concerning troubled and failed institutions, from what I have seen, the FDIC declares that anywhere from 25 to 35 percent of the failed institution's assets are declared as a loss when they close that bank. Using our bank as an example, we are a $380 million bank, the Bank of Georgia. If we were closed, the loss to the FDIC Insurance Fund would be between $95 million and $133 million. If our bank could borrow, or be supplied through TARP like Chuck mentioned, $6 million to $10 million to use as capital, we would return to being well-capitalized and we would be profitable. In addition, we would be able to pay this back over a period of time in the future. My point is that many banks could survive with a minimal-- compared to closing the bank--capital injection. This is what should have been done with TARP funds instead of forcing them on healthy institutions and telling them that they were too big to fail. I also want to mention--it is not in my testimony, but Lynn brought up this Rialto/FDIC partnership. In my opinion, these public/private partnerships are terribly--they are perverted. That just leaves the door open for a private company to make a ton of money. And from what I have heard recently over the past 2 weeks of investigating this, that Rialto/FDIC partnership is bad news. And I would highly recommend that you investigate that. It is my sincere hope that my testimony today has given you a constructive view of these items of interest. Again, I would like to thank you for your time today and I look forward to answering any questions that you may have. [The prepared statement of Mr. Rossetti can be found on page 142 of the appendix.] Chairwoman Capito. Thank you. Our next witness is Mr. Jim Edwards, the CEO of United Bank. Welcome. STATEMENT OF JIM EDWARDS, CEO UNITED BANK Mr. Jim Edwards. Good morning. Chairman Bachus, Subcommittee Chairwoman Capito, Representative Lynn Westmoreland, Representative Scott, I am delighted to be here today. My name is Jim Edwards, and I am CEO of United Bank which is based in Zebulon, Georgia. I appreciate the opportunity to speak to you today concerning the state of banking in Georgia and our bank's experience working with the FDIC's shared-loss agreements. I want to tell you a little bit about our bank. United Bank's corporate office is located 50 miles south of Atlanta and 40 miles east of where we are today in Newnan. I joined United Bank in 1993 and I became CEO in 2002. I am proud to say that I represent the third generation of my family to work with United Bank and the banks from which it was created. I am active in both State and national bank trade associations and currently serve as chair-elect of the GBA or the Georgia Bankers Association, and also serve as a member of the American Bankers Association Community Bankers Council. United Bank traces its roots back to the founding of its predecessor, The Bank of Zebulon, in 1905. Over 100 years later, more than 90 percent of our company's stock continues to be owned by our employees and our directors who live in and care very deeply about the local communities that we serve. We operate 21 banking offices in 11 contiguous counties ranging from 35 to 65 miles southwest, south and east of Atlanta. Our total assets are just over $1 billion and we offer traditional banking services along with mortgage, trust and investment products. We are pleased that we have been able to grow our employee base through this economic downturn and we now provide jobs and benefits to nearly 400 people and their families. The economic downturn which Georgia and our entire Nation have endured over the last several years has created the most challenging operating environment for banks that I have ever experienced. United Bank has historically maintained above- average capital levels and worked to make sure that our loan portfolio was well-diversified among different types of lending. This conservative philosophy has served our company well during the past century of operations. This same cautious approach encouraged our board to make the decision to apply for the Capital Purchase Program funds, more commonly known now as TARP, from the U.S. Treasury in late 2008. After a rigorous application process, we were approved for a little over $14 million in funding. Even though we were already well- capitalized at the time, the new capital has provided an additional buffer in what has certainly been a worsening economy, and has allowed us to maintain our employment and continue to make loans to qualified borrowers in the communities that we serve. Since accepting this funding in 2009, United Bank has paid just over $2.6 million in quarterly interest payments at an approximate rate of 8 percent to the Treasury. Our current plans are to begin repaying our TARP funding in May of 2012, assuming the economy begins to improve by then. United Bank has acquired 3 failed banks from the FDIC during the last 3 years. We purchased the deposits in all these transactions and loans in two of the transactions. In the early stages of the recession, the FDIC liquidated failed banks primarily by auctioning off the deposits to another financial institution and then retaining the loans themselves for disposition at a later time. In December of 2008, United Bank purchased the deposits of First Georgia Community Bank in Jackson, Georgia, using this ``clean bank'' type transaction without a shared-loss agreement. A group of FDIC contractors stayed onsite and managed the failed bank's loan portfolio for over a year, but they had little authority to make decisions or to offer options to work with customers experiencing financial difficulties. Ultimately, the FDIC bundled all the failed bank's loans into several groups and bulk sold them through an internet-based auction. The winning bidders were mostly located several States away; therefore, they knew very little about the local community. And as a result, they had minimal incentive, in my opinion, to try to take any long-term approaches to working with troubled borrowers. In August of 2009, United Bank entered into its first shared-loss agreement with the FDIC for the purchase of deposits and loans of First Coweta Bank here in Newnan. In contrast to our earlier acquisition in Jackson, we are fully responsible for managing this loan portfolio. In return, the FDIC reimburses us for essentially 80 percent of the credit losses we experience in the loan portfolio. This reimbursement is effective for the first 5 years for commercial loans and for 10 years for one-to-four family residential loans. The shared- loss agreement does not reimburse United Bank, however, for the expenses associated with funding these loans, nor does it cover the considerable overhead needed to manage this loan portfolio and remain in compliance with what are very extensive requirements involved with the shared-loss agreement. In the fall of last year, the FDIC informed us that First National Bank in my home town of Barnesville, Georgia, soon would fail and they asked us to consider submitting a bid, along with other banks. Although we were competitors, this was shocking and very sad news. Our employees in Barnesville had always enjoyed a very good relationship with First National's employees and we historically had worked together to improve the local community for decades. Our board ultimately decided not to submit a bid for First National due to our recent growth and due to the fact that we felt like the economy was continuing to turn down. However, shortly after the bid deadline, the FDIC contacted us and explained that they had received no qualifying bids from any financial institutions and that they were preparing to close the doors of First National, terminate all the employees, and simply send checks to all the depositors. They also communicated that unfortunately it appeared some customers might exceed deposit coverage limits and so there could be depositor losses from some of the First National Bank accounts. After considering how devastating this would be to one of our most important communities, our management team and board decided to submit a bid to prevent the bank payout. And I am pleased to share with you today that we were able to hire a majority of First National Bank's employees and continue banking services without any disruption to customers in Barnesville. Through these experiences, I have seen the advantages of how a loss share arrangement works, as compared to the FDIC's earlier practice of using outside contractors to manage a failed bank's loan portfolio. When a local community bank, such as United Bank, manages a loan portfolio, in my opinion, it has a very strong vested interest in trying to take a long-term approach and work with customers to overcome their financial challenges. The primary reason for this is so that we can make the borrower a life-long bank customer. The secondary reason, and you heard the regulators talk about this earlier today, is that because the bank participates in any future loan loss, we do have skin in the game and we work hard to try to minimize any future losses. We have worked very hard here in Newnan and in Barnesville to find solutions for struggling loan customers and have offered modifications and forbearance agreements. And we have had a number of successes with this type of approach. Under our agreement with the FDIC, United Bank is essentially required to manage the loss share loan portfolio in essentially the same manner as we handle our non-loss share portfolio. The FDIC has encouraged us to work with customers whenever possible. The FDIC also audits our bank regularly to make sure that we remain in compliance with all the elements of the shared-loss agreement. This enhanced scrutiny has necessitated us having to hire a number of new employees, just to make sure that we are in compliance with the shared-loss agreement. No, there is absolutely nothing good about any bank failure. We all know that. Customers, bankers, businesses, and in effect, entire communities, suffer in a variety of ways. However, as I mentioned, in our experience, the current system of utilizing a shared-loss agreement is preferable to the others used earlier in this economic cycle by the FDIC. In general, the resolution process works to keep the transition organized, it provides maximum depositor protection, encourages confidence in the safety of deposits at a critical time, and it minimizes more broad-based market disruptions. Thank you again for the opportunity to share our perspective and our experience in working with the FDIC in these shared-loss agreements, and I look forward to answering your questions. [The prepared statement of Mr. Jim Edwards can be found on page 113 of the appendix.] Chairwoman Capito. Thank you, Mr. Edwards. And our final witness is Mr. Gary Fox, former CEO, Bartow County Bank. Welcome, Mr. Fox. STATEMENT OF GARY L. FOX, FORMER CEO, BARTOW COUNTY BANK Mr. Fox. Thank you. Chairwoman Capito and members of the committee, thank you for inviting me to participate in your hearing today. My name is Gary Fox and I was in the banking business in Georgia from January 1981 until April 2011, when our bank was closed by the Georgia Department of Banking & Finance and sold with a shared-loss agreement to Hamilton State Bank. I started my career as a bank examiner with the State of Georgia and began working at the Bartow County Bank in May of 1983. I am also a certified public accountant and am now in private practice. I divided my remarks into three categories. First, how we got here, to give you some historical perspective. Second, what made it worse, where I will mention issues such as appraisal policies, market disruptions caused by unprecedented government involvement, and the application of certain regulatory and accounting policies. And third, I will mention some real concerns I have with how the loss share is playing out in the market. Included in my testimony are slides that I will be referring to that were furnished to me by John Hunt of Smart Numbers, which would be a good resource for you going forward. I saw a lot of changes in our industry in 30 years and had the pleasure to meet and know a lot of great community bankers during that time. I have a depth of knowledge about the community banking industry in Georgia that few other people have. The biggest change that I saw over the years, other than regulatory, was the ease of entry. When I first got into the business, it was quite difficult to get a bank charter. In fact, it was quite a chore to even get a branch application approved. At that time, you had to convince the chartering authority of convenience and need. Sometime in the mid-1990s, that went out the window and it seemed to me the only requirement became whether or not you had enough initial capital to meet the chartering authority's requirement. As a result, we had an overabundance of banks. Many banks relied heavily on brokered deposits since there really was not a need for the bank in that particular community in the first place. It was also a reason why so many banks did out-of-market lending and participation lending since there was not enough demand in the community they operated in. On top of that, in 1996, Georgia passed statewide branching. Previously, Georgia had been a State that only allowed a bank to operate in the county in which it was chartered unless it formed a bank holding company and entered a new market by buying another bank in a whole bank transaction. So as a result, many of the banks in markets that were not as robust branched into the metro Atlanta area to take advance of metro Atlanta's growth. This only compounded the problem. After all, it only takes a couple of folks polluting the pool to ruin the swimming for everyone. Another thing that got us here was prompt corrective action, which was put into law in 1991 as a result of the S&L crisis. While in theory, it sounded reasonable to mandate FDIC to take progressively punitive action against a bank as its initial capital falls towards 2 percent, in this environment, it was and is a bank killer. It immediately put you in a death spiral that you could not escape. Capital dried up, liquidity dried up, customers lost confidence, employees left, and regulators no longer were allowed to exercise judgment, as they were required to follow a set of draconian guidelines. And you cannot talk about how we got here without mentioning two government programs that have created market disruptions--the Troubled Asset Relief Program and the FDIC selling failed banks with shared-loss agreements given to the acquiring bank. Most banks in Georgia that have failed have been appraised out of business. To give a specific example of the appraisal problem, in the metro Atlanta area, historically the cost of a lot is 20 percent of the overall cost of a home. That means if you had a new home that cost $200,000, the lot cost would be $40,000. Today, the cost of a lot is 5 percent of the overall cost of a home, meaning that in the same $200,000 home, that lot cost is now $10,000. We have gone from a cost norm of 5-to- 1 to an abnormal TARP and loss share induced 20-to-1. This is visually demonstrated by slide 13, which is part of the set of slides that I have included in my testimony. There is another slide, number 20, that shows real estate asset disposals by TARP and loss share banks. The size of the yellow dot represents the number of lots liquidated, and they were all sold at less than $10,000 per lot. Unless you were one of the fortunate ones who received the government assistance, you had no chance to avoid significant charges against your capital due to undue influence of government money in the marketplace. Another example specific to my community was a subdivision where the lots had sold in the $90,000 to $120,000 range in 2007. The loan amount was around $43,000 per lot, which at the time seemed to be a safe margin. Most recently, those lots were sold for $9,500 apiece by a loss share bank. That is a decline of 89 percent at the minimum. This was a fully developed subdivision in a highly desirable area with a first class amenities package. Additionally, these types of appraisal-driven declines permeate throughout the local economy. You would think that what it costs to create something would have some relevance to its value, but not in today's world. Under new appraisal standards, many appraisers will tell you that cost is not relevant. All that matters is the market approach, and to a lesser extent, the income approach. Therefore, since the market approach is the most heavily favored approach and you have federally-funded asset disposal by TARP and loss share banks, we have an incredible disruption in our real estate markets here in metro Atlanta and Georgia in general. Think about how this affects the general public. Consumers cannot refinance their homes to a lower payment because their home will not appraise. The municipalities that rely on real estate taxes can no longer fund schools or police and fire protection. And to make matters worse, many bankers are telling me that new appraisals are coming in 40 percent less than last year. In Georgia, until recently, building and building-related businesses had made up 20 to 25 percent of our economy. Referring back to the Smart Numbers slides, notice slide number 15, which shows permits issued since 1996. The norm appears to be 3,500 to 4,000 per year. The current number is around 500, which is a drop of about 86 percent. In Georgia, we have had an industry that represented 20 to 25 percent of our economy not just slow down, but literally cease to exist. Another side that demonstrates the same point is slide number 3. Normally, new homes make up about 50 percent of the home sales, but most recently, they represent less than 10 percent of that total. The decline is not only a result of lack of inventory from lack of funding, but it is also because of the undue influence of TARP and loss share money in the real estate market. If you take a look at slide number 8, you will see that the average new home in the first quarter of this year sold for around $225,000 while the average resale was $97,000, primarily due to foreclosures. A lot of asset devaluation has to do with a regulatory system trying to flush out the overall system as quickly as possible. As a result, the economy in general is being significantly hindered. A couple of other accounting-related issues of great importance are loan loss reserves and the deferred tax asset. Historically, banks use the experience method, called FAS-5, to fund their loss reserve. In May of 1993, an additional loss measure called FAS-114 was put into place, which I will not discuss today. Under the experience method, banks looked back at their average 5-year loan losses and set aside an amount that would cover those same losses as if they were going to happen again. In the 5-year look back, some years were better than others and the reserve balanced out. Over the last few years, banks have been required to shorten their look-back period to anywhere from 2 quarters to 5 quarters. This basically has the effect of capturing your worst historical loss periods and having to fund your loss reserve as if it were going to happen again. This has a direct effect on reducing capital, since only part of your loss reserve is allowed to be counted toward risk-based capital, and none of it counts towards tangible equity, which is the ultimate measure under prompt corrective action. Also of importance is the deferred tax asset. The deferred tax asset is a balance sheet account that is the result of timing differences between financial accounting and tax accounting. A deferred tax asset is a benefit you stand to gain in the future and in our current environment, this is primarily a loss carryforward. So if you had a couple of years of net losses, those losses would carry forward to reduce future tax liability when you have net income. Unfortunately, regulatory requirements state that you must disallow the amount of your deferred tax asset that you cannot demonstrate you can recoup in net income within the upcoming 12 months. When the entire amount becomes disallowed, it must be subtracted from tangible equity. In this environment, a 12-month look forward for the deferred tax asset should be reconsidered and a longer look put in place. In my home county, Bartow County, there are three loss share banks. The fact that there are so many loss share banks in this area has only exacerbated the asset value problem. It is clear to me that loss share banks stand to make more money by forcing the issue rather than working with the customer. In Georgia, community banks generally do balloon notes on commercial properties. This is done as an interest rate risk management tool. So at the end of 18, 24, 36 months, the entire balance of the loan is due. The commercial loss share part of the acquiring bank's agreement, which is 4.15B, is for 5 years. I fear that as the fifth year anniversary of the shared-loss agreements comes closer, rather than losing the protection of the loss share, many of these loss share banks will pursue judgments and foreclose so as to maximize financial gains, regardless of the borrower's past performance or capacity to pay. Another loss share issue is home equity lines of credit. While they generally fall within the provisions of the single family shared-loss agreement, which is 4.15A, which has a 10- year duration, they are specifically separated from the mandatory loss mitigation provisions required for single family loans. Instead, they fall within the other shared loss loans category, which simply requires the acquiring bank to try to mitigate loss consistent with its own policies. Since this product became popular in the early 2000s and originally had a 15-year maturity, later a 10-year maturity, many will be coming due in the next 4 to 8 years. What could easily happen is the loss share bank will get an updated appraisal, which will probably be valued down and then it will have to mitigate loss consistent with its own policies. Basically, this means there will be a whole lot more pressure on an already stressed consumer. And since there is no incentive to allow those loans to get outside of the loss share period, we could see another round of judgments and foreclosures. As a result, I think we will be mired in this real estate mess for quite a long time. Another problem I see with the loss share is it does not allow the loss share bank any judgment in its collection practices. Several months ago, one of these loss share banks in our community filed suit against a borrower. This particular borrower had had a debilitating stroke and would never be able to work again, and had lost everything. In prior years, the bank would have written the loan off and gone on down the road. I called someone I knew who worked at the loss share bank and asked, ``Considering the circumstances, why are you suing this person?'' He simply replied, ``That is the only way we can collect on the shared-loss agreement.'' I cannot imagine that is our government's intent. In closing, I also want to point out that the regulators I dealt with at all levels were both courteous and professional. I do not believe they take any joy in closing banks. I also want to point out that, particularly during the prompt corrective action process, I was told many times by the regulators that their hands were tied, they had no choice but to follow the requirements of prompt corrective action. Therefore, it is clear to me it is not an issue of regulators; it is an issue of regulations. So if this committee truly wants to make a positive change, it is going to have to come on a legislative level, not a regulatory level, to deal with these particular issues. Again, I want to thank you for inviting me to be part of this hearing and I hope that something positive comes from it. [The prepared statement of Mr. Fox can be found on page 116 of the appendix.] Chairwoman Capito. Thank you. I want to just ask a quick question, and then a follow up, and then we will move on. Mr. Copeland, each one of you, will you tell me who your regulators are? Mr. Copeland. The Office of the Comptroller of the Currency. Mr. Rossetti. FDIC. Mr. Jim Edwards. State-chartered bank, also regulated by the FDIC. Chairwoman Capito. And you were? Mr. Fox. State and FDIC. Chairwoman Capito. FDIC, okay. Now, you have made your statements and they are all very, very good. But you had the benefit of being the second panel, so you also heard the regulators. What, in your mind, Mr. Copeland--and Mr. Scott talked about this a lot in the first panel, the sort of talking past each other, lack of communication--if there was something glaring that came out of some of the statements the regulators made that did not fit with what you see in practice in your bank, what would that be? Mr. Copeland. I was not at great disagreement with any of the statements made by the regulators. However, because this is not a personal issue, I do not believe-- Chairwoman Capito. Right. Mr. Copeland. --there are no personal attacks involved. But I will say we have seen a clear difference in the tone of particularly the written reports of exams that we have received, as we have moved further out, that risk compendium in the eyes of our regulator. Whereas the initial reports of examination that we got had a very clear tone of understanding with regard to what got us here in this unforeseen catastrophic collapse, I believe it was Mr. Barker, my own regulator, who talked about this was not a steady slowing market, but literally we fell off the cliff. And what we have seen is a change in those reports, with an understanding that is what got us here and this is still a competent management team, for example, running this bank. And we do see positive aspects to this bank with regard to liquidity for funding and so forth. You see a change in tone in the reports of examination that clearly show what I would describe as legal edification where you are seeing verbiage come into these reports that is designed to bring it into step with prompt corrective action and other regulatory tools that are out there. And that is not for our benefit, I feel. It is for the benefit of being able to look back and kind of self-justify why particular actions may have been taken with the bank or might be taken in the future. So that is a tough thing to articulate and it should not come across as, for lack of a better word, whining, ``they are picking on me on the playground'' sort of thing. So we try to be careful as we say those things, because again, I do not believe it is personal. Chairwoman Capito. Right. Mr. Rossetti, do you have a comment? Mr. Rossetti. Yes, ma'am. There are two things. The first is when the regulators come in to regulate us, one of the first questions that the directors ask is what is the regulator like, what is the personality, how are they going to be on us. And that should not be a concern if they are dealing equally with all of the regulations. But a lot of the time it comes down to personality and that is something that I think the guys up in Washington do not understand, that it does depend a lot on who the regulator is and what they are like as to how that exam is going to come out. The second thing is their misunderstanding I believe of the loss share and how effective it is. I think you need to look at the two types of banks out there--a community bank under the loss share who has a stake in that community is going to administer the loss share differently than a large bank where you are just a number. And it has been my feelings with those large banks that they are very onerous and very stiff with their dealings with the loss share. They want that out of the bank, they do not care if it is performing, non-performing, whatever. They want it out of that bank and they want to get their money off the loss share. So those two things. Chairwoman Capito. Thank you. Mr. Edwards? Mr. Jim Edwards. Being a State-chartered bank, we are regulated one year--we will have the State Department of Banking & Finance in one year and the FDIC will come in the following year. And we have not--we are now due, although I probably should not remind my regulators of this, but I am sure we will have an FDIC exam before long. I hope I do not say anything today that causes that to be any sooner. But in terms of what they said, I think we have found certainly maybe a more challenging time with regulators but I think we all have to understand the backdrop here, how difficult these economic times are. The way you could structure something maybe in better times is not the way you can do it today unfortunately. And I look forward to those days when things will be better. I think in our discussions with regulators, obviously there are new requirements that come out, but we have felt like there has at least been a dialogue with them about that. And certainly I do not know a banker working today who believes or agrees with the regulators about everything they say. But I think in general terms, we have felt that they are trying to work through this situation too, in most cases. Chairwoman Capito. Mr. Fox? Mr. Fox. I think the loss share is having a far greater effect on local communities than maybe what they feel like right here. And it is a difference. There are some banks, while they may be locally chartered in the State of Georgia, they are funded by huge dollars from Wall Street or wherever, by venture capitalists. And those guys did not get into banking because they want to make 2 percent on assets, I promise. Chairwoman Capito. Thank you. Chairman Bachus? Chairman Bachus. Thank you. I want to commend all you gentlemen for the tone of your testimony and for the specificity. I think you have actually given us some real meat. Mr. Fox, I especially appreciate you being here. As a former banker, you could just walk away, but you are still obviously concerned about your colleagues and the business, and I think that speaks well of your character. Mr. Fox. Thank you. Chairman Bachus. I commend you for that. We mentioned shared-loss agreements, that keeps coming up. I think there is a problem there and I think it is something that needs to be looked at again. I think particularly--not particularly, but also when you have participation agreements, it can be a problem for those institutions. One thing that came up that I do not think we talked about on the first panel was writing down a performing loan, which at least two of you mentioned. We have often used the words ``paper profit'' or ``paper loss'' where you write down performing loans and you have to raise capital and then an institution has restrictions or challenges because of, not actual losses but just the write downs of performing loans. And I think that is particularly frustrating and bears more watching. So I appreciate what you said about the prompt corrective action, that it may be the regulation, it may not be the regulators in those cases. They are following the law. And then that becomes our duty to review. And finally, Dodd Frank--2,400 pages--and I can tell you the regulators appreciate that you are concerned about them because they are pretty much struggling with it on a daily basis, they are overwhelmed by that regulation. So the regulators are even overwhelmed by the regulations. And when it gets to that point, you know you have a problem. I know one Georgian, Newt Gingrich, has actually said we need to repeal Dodd-Frank. We seriously need to take a strong look at it, I will tell you that. We are going to have a hearing on that in October, as to how the economy is going to swallow that massive undertaking. I will yield the balance of my time to Mr. Westmoreland. Mr. Westmoreland. Thank you, Mr. Chairman. Before we close, I want to thank Mr. Don Mixon for allowing us to use this Performing Arts Center. It is a beautiful building. Thank you for allowing us to use the facility. And I also want to thank Chief Deputy Mr. Riggs for being here today and for the whole staff of the Newnan Police Department for being here and providing the security. So thank you all for what you do. Let me say just for the benefit of maybe everybody in the audience, I think most of you are familiar, but to some of these gentlemen who have great careers with the FDIC and the OCC and with the Federal Reserve, and I want to thank you all for your 30+ years of service or whatever you have been there. But you need to talk to some of these guys on a regular basis, some of these guys who are out there actually making the loans. Not your regulators, but talk to some of the people making the loans, talk to some of the people who are being punished by some of your regulations. And believe it or not, until the construction business comes back, our unemployment is going to stay high and this economy is not going to get going again. That is just a fact. Now let me say, what happened is a lot of these TARP banks, and we had some come into our communities that had gotten a lot of money and they fire sold, they did public auctions and sold these properties. And that brought the value down. So then some of our community banks were demanded to write down these loans immediately. Is that not true? And so they wrote down the loans immediately and had to have more--a loss of I guess reserve, grow their capital, were told to reduce their real estate portfolios in many cases. Then after that wave, we had the shared-loss agreements. Now Jim Edwards--if everybody who came into a community was like Jim Edwards, especially down in Barnesville and the relationship he had with that bank across the street, we would not have a problem. But when you have banks coming in here from California--and I am not picking on them--or Arkansas or others--I know we had testimony that said that these other banks were 10 banks adjoining Georgia. That is not true. So they do not know the community and so with their loss share, I think as Mr. Fox pointed out, the quicker they flushed these things, the better off they were. So we had another round with our community banks. And now we have communities that do not even have a community bank. And why people who have been regulating for 30+ years at the FDIC and the OCC could not see that this ball was going downhill, it was going downhill. We were losing thousands of jobs, generational wealth was being sucked out of our communities. People were losing their investments. We were losing our community banks, pillars of the community lost everything they had. Why could we not recognize that and see if we could not come in to see a Chuck Copeland or a Michael Rossetti or Jim Edwards or Mr. Fox and say, what we might need is some advice on how to do this because I have been in Washington for 30 years? Is what I have described basically what happened to our economy, especially here in the Third Congressional District? Mr. Copeland. There is no doubt, it is the massive devaluation of real estate that has impacted all of our banks. And there are many reasons for that. Mr. Westmoreland. Right. And Mr. Fox, you mentioned that we do not need to do anything with the regulators, we need to do something with the regulation. I could not agree with you more. But say you do something legislatively, what would you propose that we could do legislatively that would help? Mr. Fox. It seems to me--and this is a double-edged sword, probably the reason we have prompt corrective action is you all wanted to take judgment away from the regulators. I think they need to be given some amount of judgment. And of course, if they are given that judgment, they need to use it wisely. Because when you look at the way real estate values have collapsed in Georgia, a non-assisted community bank, it is going to be a struggle. If this does not correct itself within the next 4 or 5 years, I do not know what is going to be left. But we cannot survive such an asset devaluation. And I think you would just have to give these banks some time through some kind of regulatory--I mean legislative--leeway for them to have. Mr. Westmoreland. So how about if there was a 5-year period to write down some of these loans, that some of them are even performing, where people are paying their interest, they are meeting their takedown schedules, and they are still being made to write these loans down because somebody is saying that it will not ever be worth that much money or they cannot pay it. Would it be of any assistance if there was some room to where they would write this down for a certain period of time, maybe even go back 24 months and go forward say 36 months, or whatever, if they were still in business, to be able to adjust some of these loans? Mr. Fox. Sure, it would be helpful, yes. I think that approach may have been tried back in the S&L days, and that has been brought up. I know another banker, Chris Maddox, brought it up to the FDIC. Mr. Westmoreland. Chuck, would that have hurt you? Mr. Copeland. Oh, there is no doubt it could make a difference. I do think there is this whole issue of transparency though and someone being able to pick up a call report or a financial statement and truly be able to assess the condition of a bank that is using some of these smoothing techniques with regard to funding writedowns, but I would think that that could be handled through memorandums to call reports or whatever, as a way to capture how much a bank does have in this pool of asset writedowns that it is accreting onto its books, and a process for how you re-evaluate values there and you adjust that pool, so that someone can pick up my call report and know exactly what sort of hangover effects I am still dealing with from the real estate meltdown versus say Jim's bank, who might be in a different situation. Mr. Westmoreland. You would be glad to work with any of these folks to give them an idea, wouldn't you? Mr. Copeland. Oh, no doubt about it. And you have to cut through some of the rhetoric too, because when you talk about writedowns on performing loans, I think there is a bit too much anecdotal jargon getting thrown in there. And for example, I know our experience with our regulator, I cannot say I have ever experienced having to write down a performing loan. But there is a point at which the regulator-- Mr. Westmoreland. Even if the appraisal had come back for half the price of the loan? Mr. Copeland. Again, there is a difference between being forced by a regulator to write it down and having to reserve. The nuance in that, though, is the effect on my capital is the same. I have had to remove it from earnings and either put it into my loan loss reserve as a specific earmark against that credit or I have had to take the writedown. So the impact on my capital ratio is the same. I think we have to remove some of this rhetoric and anecdote from some of this if we are going to get to real solutions. Mr. Westmoreland. I will go ahead and close because I know we are running out of time. But let me just thank all of you for coming and thank all of you for doing this. I would hate for the FDIC to get the same reputation as the IRS. Chairman Bachus. I think you have your own time now. Mr. Westmoreland. Oh, I do. Chairman Bachus. You can start the timer again. Mr. Westmoreland. That is Ellen, and she has just given me five more--I will take just a couple more minutes then. I know lunch is getting near. But it is amazing that the FDIC when they come in and actually be the receiver does not want to work with a lot of these people. I have had a number of them call and tell me that they had loans that they offered to buy or whatever and then they were put up for auction. And then, they are sued personally by a partner with the FDIC. That just does not sit well with me. In a non-recourse loan for 7 years, interest free, there is something wrong with that. Really and truly, there is something wrong with that. When we put out banks and we suck this money out of the community and we are in business. It would be a little bit different if this company, Rialto, was not--I think most of them are from a home building company and I think 5,100 of the 5,500 loans were actually residential loans. So there is just something weird with that. But I know there are a lot of new partners for the FDIC out there right now just waiting to put together their money and call them and say, look, we want to be in business. But thank you all very much for coming and I hope we all learned something today. I hope we will take it back to Washington--Chairman Bachus, Chairwoman Capito, and Congressman Scott--so that we can write some legislation that will help out here in the real world. Maybe not in Washington, but out here in the real world with people who sit across the desk from these folks who have to make a decision on whether to loan money or not. I do think we need to look at some of those regulations that Mr. Fox mentioned about having to sue somebody to be able to get your loss share part of it. So there are a lot of different things that we can look at. I know that Chairman Bachus has been great about looking at this, about having the hearings and I want to push forward with it. So with that, I will yield back the balance of my time. And again, I thank everybody for coming. Chairwoman Capito. Thank you. Mr. Scott? Mr. Scott. Thank you. I would just like to start off by commending each of you for excellent testimony, very thorough, very informative, and providing us with a lot of good information. I would like for my line of questioning to kind of zero in on this area of conflicting communications--the banks and the regulators. I think you all were probably here when I asked the regulators if they felt that their standards were so restrictive that it was inhibiting lending, and their basic response was that they did not feel it was. And I would like for you to address that. Do you feel so? If I remember, I think, Mr. Copeland, you said they were sending shifting messages and the examiners were making contradictory statements that sent you clamoring for cover. Mr. Copeland. Correct. Mr. Scott. That is certainly a stark difference from what the regulators said. Mr. Copeland. I can tell you there is a marked difference between how we feel and how we maneuver through our normal day- to-day in the management of our banks during times when we do not feel the cloak of the regulator. And that cloak of the regulatory being most present during periods of exam, where you truly do feel almost paralyzed in terms of dealing with the day-to-day running of your bank. With regard to the contradiction, there are two things there that I would point to. One is--and this is somewhat of a selfish statement--one of the tenets of the CAMELS rating is the management component. We have the same management team and same board of directors in our bank that was there in the period of the early 2000s when our bank was generating record earnings and receiving nothing but the highest of regard from our regulator. My reports of examination today have a very indictful tone towards management and the board of the bank. But it is the very same people. Mr. Scott. Did you say indictful? Mr. Copeland. Indictful, yes. So it tends to put you in a very guarded position. The other thing with regard to contradiction; again, in our report of examination, we never had any significant reliance upon wholesale funding, brokered deposits or those things, we were always a core funded community bank. And that gets a brief acknowledgement in a passage in a report, but then it will go on to say in the same paragraph, ``but due to the bank's high level of non-performing assets and its elevated risk profile, liquidity is insufficient'' and it may even go in some passage to take it a step further and say, ``and this constitutes an unsafe and unsound banking practice.'' Back to prompt corrective action. The trump card that has to be there before they can play prompt corrective action is they need to be able to assert these unsafe and unsound banking practices. Mr. Scott. So with the regulators here in the audience listening to what you have to say, what two major recommended changes would you like to see in their procedures? Mr. Copeland. I would like to see patience exerted in how verbiage and terminology finds its way into the report of examination. I want a report of examination that 20 years from now my 5-year old child would not be embarrassed and ashamed to read about his dad. Mr. Scott. Okay. Mr. Copeland. In simple terms. Mr. Scott. Right. Mr. Copeland. But in addition to this patience, forbearance. And an example of that would be we are under a public regulatory order, so I am not disclosing anything that is not out there in the world to see, which requires that we achieve and maintain 9 percent tier 1 leverage and 13 percent total risk-based capital. We were in excess of those levels by and away during good times because that is the way we ran our bank. We understand the core principle of capital being your cushion against bad things that can happen in a risk-associated industry. Bad things happened to us, our capital has eroded. We need forbearance to work with our regulator on how we get back to that 9 and 13 over a reasonable period of time. There is no capital out there to a community bank in a community of my demographics, 13 percent unemployment, 30-odd percent of my population not being high school graduates, housing prices in the tank. There is no--outside of perhaps maybe with the beauty of a nice FDIC 80/20 loss share, some venture capitalist from New York who might like to take a bite out of our bank. So we do not disavow the importance of the capital, but to have an expectation and a demeanor in how that expectation is communicated that we be able to restore those capital levels to that 9 and 13 in an environment that just for all practical purposes and common sensical analysis will not support that. Mr. Scott. Okay. Mr. Copeland. The tools are already there with regard to what is defined as adequately capitalized. The trigger is there within prompt corrective action with regard to the forced dissolution of a bank. We understand the need to abide by those and will continue to do our dead level best to do it. But it is indeed crippling to realize that is not enough. Mr. Scott. Okay. They are sitting out there, they are listening. So we hope that they hear what you are saying and we can move to correct. But going a little bit further, of course, lending--we have been touching upon that, that is a great concern, it is really at the core of this field hearing, the whole issue, of course lending is the key. Banks cannot make money if they do not lend, and we cannot recover our economy if they are not lending. Mr. Rossetti, you came right out in your statement and said in fact it is preventing you from lending. How is that? Mr. Rossetti. Our lending guidelines for AD&C lending, the FDIC has written them down to 100 percent of capital. We are at 450 percent of capital. We will not get down there in 30 years. Mr. Scott. Repeat that again. Mr. Rossetti. They have put such an onerous guideline on us to lend money for AD&C lending, acquisition, development and construction lending, that--they put a guideline on us that we cannot achieve. And we are just prevented from bringing in any new business to lend money to people doing AD&C lending. Mr. Scott. And what would you recommend that formula be? Mr. Rossetti. It gets back to what Chuck says, common sense, if you get a loan, say a builder comes in, he has a presale home to build on somebody else's lot and the customer that he is building for is completely qualified. It is a commonsense loan. We cannot do that. We could not lend money in that situation because it is outside of our guideline. Mr. Scott. And have you presented this particular issue to the examiner or to the regulator in any way? Mr. Rossetti. I am sure it has been discussed. Mr. Scott. But have you yourself discussed it? Mr. Rossetti. Not myself, no. No, I have not, but I know what the guidelines are and I know the revised guidelines that they put us under to do that kind of lending, and it is just going to be impossible for us to get there for a long period of time. Mr. Scott. And you had some things to say about the shared- loss agreement, which you felt was the most onerous. And I think it might have been you, Mr. Edwards, I wonder if you might--you said that, if I understand you correctly, that there is a requirement that you hire new people in order to be in compliance with the shared-loss agreement. Mr. Jim Edwards. Yes, sir. They did not require that we hire new people per se in the contract, they just--we entered into a contract and it has a number of obligations and we have to make sure that we comply with all different things in the contract. Mr. Scott. And when you say ``they,'' you are talking about the FDIC? Mr. Jim Edwards. Yes. Mr. Scott. Okay. Do you believe--do each of you believe that there ought to be some restructuring in Washington regarding the regulation of our financial institutions to fit these economic times, that would be different? And if so, what would those be? Mr. Copeland. I think without a doubt. And honestly, it had not occurred to me until Mr. Fox's testimony just what a hurdle prompt corrective action creates for the regulator, and that perhaps it is not so much the regulator, but the regulation. And I understand the 2 percent capital minimum and the time in which that came from, but I would assert that there are banks out there that have a strong enough core element to their DNA that they could survive with negative capital. Now, you could not survive indefinitely, but you could certainly survive at less than a 2 percent capital level. Mr. Scott. Okay. And just a final question. If you could zero in on and categorize--we have discussed many issues here, what would be the single deterrent to banks lending more now? What would that be? Mr. Fox. Most banks, or a lot of banks in Georgia, a high number, are under a regulatory order of some sort. And usually in those orders, there is a limitation on your lending, there is a limitation on how much you can grow. So by virtue of that, you have to meet a minimum capital standard and every time you make a loan, it usually goes, based on risk-based capital, that is going to reduce your capital ratio. So basically, once you come under order, all you are managing from that point forward is liquidity in capital, that is all you can really do. Mr. Scott. Just one last question, if I may, Mr. Chairman, this will be my last one. But it just intrigues me that you, Mr. Fox--I think you mentioned that you were once an examiner, is that correct? Mr. Fox. Yes. Mr. Scott. So that puts you in a pretty unique position here, to be able to add some perspective. And I really want to try to get to this, because as I mentioned before, Lynn and I find ourselves in a pretty good position with our bill having passed the House, and over in the Senate, and we have a pretty good bipartisan approach to this bill. That, unfortunately, does not happen very often. So we have a very live vehicle here and I am wondering--you remember I asked the regulators when they were here what they were doing that was so restrictive that stopped the lending, and they basically said, it is not our fault. But you hear from the bankers here that yes, some of this is their fault. What is the true story here? You have sat in both seats here. Who is telling the truth? Mr. Fox. I am not going to call anybody a-- [laughter] Mr. Scott. Let us put it this way, who is more accurate? I did not say it correctly; who is more accurate? We really have to get to-- Mr. Fox. Mike made probably one of the best points I have heard today about the fact that if someone comes to his bank right now, because they are restricted from increasing their concentrations in real estate--construction lending, it is a presale, it probably has a mortgage takeout--he cannot make the loan. That does not make sense. So that's a great example. You really need to be able to use some common sense like he is saying. Does this credit stand on its own and if it does, then we ought to be able to make it. Mr. Scott. Okay. So there is some truth to that statement and we will just say that we will work with our regulators to see what we can do here. Thank you very much, it has been a very good session. Thank you. Chairwoman Capito. Thank you. Before I dismiss the panel, I would like to thank them for their very great comments and answers to questions and their statements. We will be taking this back to Washington, working with this bill and others to try to strengthen the possibility of a faster rebound for everybody. I would like to thank the audience for being a great audience and being so attentive and sticking with us. This has been a very lengthy hearing. I would also like to thank panel one, the four regulators, they are all in the audience, so I would like to thank you all for staying and listening as we requested, and that is duly noted. Right, Lynn? Mr. Westmoreland. Yes. Chairwoman Capito. And I would like to also thank Mr. Westmoreland's staff for putting this together and at such a beautiful facility and I think creating two panels that have been very enlightening. So with that, the Chair notes that some members may have additional questions for this panel, which they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions to these witnesses and to place their responses in the record. With that, this hearing is adjourned. [Whereupon, at 12:20 p.m., the hearing was adjourned.] A P P E N D I X August 16, 2011 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]